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LIBRARY 

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Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/fireratingasscieOOdeanrich 


Fire-Rating 

As  a  Science 


Fire-Rating 

As  a  Science 


BY 

A.  F.  DEAN 


"Get  your  Principles  right,  then  'tis  a  mere 
matter  of  Detail'^ 

-—NAPOLEON  BONAPARTE 


'» 


I9OI 

PUBLISHED  BY  J.  M.  MURPHY 

928  NEW  YORK  LIFE   BUILDING 

CHICAGO 


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Copyrighted  1901 

BY 

A.  F.  DEAN 


€f)t  ILti'ktsiibt  Ifress 

R.R.  DONNELLEY  &  SONS  COMPANY 
CHICAGO 


THIS   BOOK  IS   DEDICATED 
TO 

AMOS  J.  HARDING 

IN  GRATEFUL   REMEMBRANCE   OP 
A  FRIENDSHIP  OF  TWO-SCORE   YEARS. 


227491 


CONTENTS 


PART  I 

PRINCIPLES 

What  Is  Science? 

Natural  Laws  Defined 

The  Relativity  of  Knowledge 

Symbols  .  .  .  -  - 

Standards  -  - 

The  Law  of  Rhythm 

Law  of  the  Wave  of  Fire  Destruction 


PAGE 

3 
17 
19 
24 
29 
32 
37 


PART   II 

DETAIL 

The  Evolution  of  Procedure  in  Fire-Rating   •  -  -47 

The  Formula  of  the  Rating  Function           ...  56 

The  Individual  Rate    -------  60 

Basis  Tariffs             ..-.---  63 

Classification  in  General     -           -          -           -          -          -  68 

The  Individual  Classification  List     -           -           -          -  73 

Uniform  and  Combined  Classification      -           -          -          -  78 

Class  Differentiation       ......  81 

Rate  Standard    -           -           -           -           -           -           -           -  83 

What  Shall  the  Standard  Be?             ...           -  86 

The  Establishment  of  Cost  Estimates     -           -          -          -  89 

Relations  Between  National  and  State  Tariffs  of  Cost 

Estimates      --------  91 

The  Comity  of  Fire  Insurance  -----  94 

The  Law  of  Relation  Between  Net  Underwriting  Profit 

AND  Class  Cost  Waves          -----  100 

The  Relations  of  Fire  Insurance  to  Chance  and  Proba- 
bilities    --------  103 

Metropolitan  Conflagrations         -           -           -          -          -  112 

The  Personal  Equation    -           -           -          -           -          -  ii4 

National  Loss  Waves  in  the  Light  of  the  Diagram   -          -  118 

State  Loss  Waves  in  the  Light  of  the  Diagram    -           -  131 

Dead  Reckoning            -------  189 

vii 


vm 


Contents 


Drift  and  Leeway 

Summary 

The  Transition 

NoTA  Bene 

Conclusion 


PAGE 

193 

196 
200 

205 

208 


APPENDIX 


External  Exposures 


Introductory 


There  has  been  no  time  within  the  memory  of  the  present 
generation  when  fire  rates  in  the  United  States  have  agreed 
among  themselves,  or  when  they  have  not  been  in  a  state  of 
chronic  clash  with  everything  else;  no  time  when  they  have  not 
been  a  bone  of  contention  between  fire  insurance  and  the  public, 
and  a  chip  on  the  shoulder  between  underwriter  and  underwriter. 
It  is  a  time-honored  adage  that  no  truth  ever  collides  with  another 
truth,  and  without  the  unreasonable  assumption  that  everything 
else  is  at  all  times  in  the  wrong,  it  is  impossible  to  conceive  that 
a  thing  could  collide  at  so  many  points  with  so  many  other  things, 
were  there  not  something  fundamentally  untrue  in  its  compo- 
sition. 

Fire  underwriters  are  a  busy  tribe.  Too  deeply  engrossed  in 
the  immense  and  constantly  accumulating  details  of  their  business 
to  generalize  upon  the  methods  of  reasoning  they  employ,  and 
too  busy  to  heed  the  generalizations  of  others,  they  have  allowed 
the  spirit  of  adventure  to  elbow  the  spirit  of  research  into  the 
background.  Instead  of  trying  to  solve  a  mathematical  equation 
by  earnest  study,  they  have  permitted  it  to  be  dragged  by  con- 
flicting interests  into  the  arena  of  popular  discussion  where,  as 
might  be  expected,  with  one  hundred  and  fifty  million  dollars  of 
annual  spoils  in  sight,  the  voice  of  truth  has  been  drowned  out 
by  a  jargon  of  discordant  opinion;  one  clamoring  that  fire-rating 
is  a  science,  another  that  it  is  not  and  never  can  be,  another, 
that  it  is  of  no  consequence  whether  it  is  or  is  not,  so  long  as  it 
furnishes  salaries,  dividends,  and  commissions.  Meanwhile,  if 
their  lives  depended  upon  it,  not  one  of  the  disputants  could 
furnish  an  intelligent  definition  of  science. 

To  determine  the  real  relation  between  fire-rating  and  science* 
is  the  problem  of  problems  in  fire  insurance.      The  final  solution 
of  this  problem  is  pregnant  with  fate  to  the  future  of  the  industry, 
for  upon  this  solution  depends  whether  it  shall  ultimately  take  its 


X  Introductory 

place  among  the  honored  social  forces  of  the  future,  or  forever 
remain  one  of  the  discredited  manifestations  of  civilization  which 
are  endured  because  they  cannot  be  cured.  If  fire-rating  can  be 
made  a  science,  there  is  but  one  right  thing  to  do,  and  that  is  to 
make  it  a  science  at  any  cost. 

If  fire  insurance  as  a  whole  is  an  activity  of  two  distinct  parts, 
one,  the  selling  of  indemnity,  commercialistic,  the  other,  the 
measurement  of  fire  hazard,  scientific,  it  is  a  duty  to  separate 
these  parts,  for  they  have  little  in  common.  Like  the  masculine 
and  feminine  temperaments,  yoked  together  in  matrimony,  it  is 
their  fate  to  go  through  life  viewing  things  from  different  stand- 
points, but  obligated  by  a  life  contract  to  co-operate.  Domestic 
harmony  between  this  ill-assorted  pair  can  be  established  only 
through  a  plain  understanding  as  to  mutual  rights  and  obliga- 
tions. Commercialism  means  expediency — compromise,  while 
science  makes  no  compromise  and  bows  not  to  expediency.  The 
boundaries  between  these  parts  may,  at  times,  be  indefinite,  but 
if  fire-rating  ever  becomes  a  science,  its  boundaries  must  be  made 
so  plain  that  they  cannot  be  questioned  and  then  preserved  invio- 
late. In  its  domain  as  a  science,  there  should  be  room  for  the 
undisturbed  search  for  truth,  as,  in  the  outlying  territory  of 
commercialism,  there  should  be  all  necessary  latitude  and  longi- 
tude demanded  by  the  universal  quest  for  profit  in  all  legitimate 
ways.  To  mark  off  and  maintain  the  boundaries  between  science 
and  commercialism  in  the  dual  nature  of  fire  insurance,  will  be 
to  quiet  the  present  confusion  of  tongues  and  ideas  and  establish 
a  permanent  entente  cordiale. 

In  a  burst  of  common  sense,  the  venerable  Bede  once  said, 
"Either  then  show  why  a  thing  is  so,  or  a  purpose  wherefore  it 
is  so,  or  else  cease  to  declare  it  so."  Even  unto  the  present  day, 
this  is  good  advice  to  fire  underwriters,  for  it  is  idle  to  waste 
further  time  in  asserting  that  schedule  rating  is,  or  is  not  a 
science,  without  a  definite  idea  of  what  constitutes  science.  With 
this  end  in  view,  the  first  part  of  this  book  is  devoted  to  a  study 
of  fundamental  principles  so  far  as  these  principles  have  any 
bearing  upon  the  problem  of  fire-rating. 

There  can  be  no  intelligent  study  of  the  subject  without  a 
preliminary  study  of  the  principles  on  which  all  science  is  founded. 


Introductory  xi 

If  we  cannot  make  fire-rating  conform  to  these  eternal  verities, 
it  will  be  time  to  admit  that  it  is  something  which,  by  its  nature, 
is  forever  doomed  to  remain  outside  the  domain  of  science.  If, 
on  the  other  hand,  these  verities  reveal  that  fire-rating  is  not,  by 
nature,  the  lawless  thing  it  has  been  allowed  to  become,  and  in 
the  face  of  this  revelation  we  fail  to  make  it  conform  to  these 
verities,  we  stand  answerable  at  the  bar  of  public  opinion  to 
explain  whether  our  omission  is  due  to  incompetency,  indiffer- 
ence, or  wilful  intent.  This  is  the  trilemma  that  confronts  fire 
underwriters  to-day  in  many  important  states  where  schedule- 
rating  has  been  placed  under  the  ban. 

This  investigation  is  based  upon  the  hypothesis  that  public 
intelligence  of  the  twentieth  century  will  not  outlaw  science  in 
fire-rating,  when  we  have  found  it  and  are  prepared  to  prove  the 
fact,  and  that,  if  we  ever  find  it,  we  must  first  interrogate  science 
itself.  The  interrogation  pursued  in  the  following  pages,  crude 
and  imperfect  as  it  may  be,  elicits  answers  by  no  means  Delphic — 
answers  which  point  out  in  clear  and  unmistakable  language  not 
only  what  to  do  but  how  to  do  it,  and  while  these  answers  disclose 
many  startling  departures  from  scientific  principles  in  our  rating 
procedure,  they  are  full  of  encouragement  in  showing  that  the 
transition  to  right  methods  involves  no  violent  organic  upheaval 
of  existing  system,  such  as  it  is,  that  it  entails  no  hardship  to  the 
industry,  or  to  the  public. 

In  the  chapters  devoted  to  pure  science  the  author  has  simply 
aimed  to  state  generalizations  which  constitute  working  hypoth- 
eses in  modern  scientific  thought,  and  while  the  explanatory 
illustrations  may  be  original,  the  principles  stated  are  the  com- 
mon property  of  science.  The  conclusions  reached  from  these 
principles  are  open  to  all  fair  criticism.  The  spirit  of  science 
is  no  less  earnest  to  detect  fallacy  than  in  its  search  for  truth. 
If  shown  to  be  wrong  in  his  conclusions,  the  author  will  be 
consoled  by  the  fact  that  the  temple  of  science  is  surrounded 
by  the  debris  of  discarded  hypotheses  which  have  served  as  scaf- 
folding in  its  erection,  and  he  will  at  least  indulge  in  the  hope 
that  his  labors  may  not  be  without  value  in  stimulating  other  and 
abler  investigators  to  pursue  the  quest  for  truth  with  equal  faith- 
fulness and  better  success. 


xii  Introductory 

The  subject  of  fire-rating  is  certainly  not  less  arid  to  the  author 
than  to  others  who  have  a  far  greater  financial  interest  in  it.  It 
offers  neither  moneyed  reward  nor  glory;  on  the  contrary  any 
discussion  that  hews  to  the  line  of  truth  for  truth's  sake,  may 
confidently  be  expected  to  elicit  some  unfriendly  criticism.  In 
spite  of  these  facts,  the  subject,  unattractive  as  it  is,  has  for 
years  claimed  many  a  leisure  hour  which  certainly  for  himself, 
and  possibly  for  others,  might  have  been  more  profitably  spent 
in  needed  recreation.  With  this  brief  confession,  the  author  dis- 
burdens himself  of  his  long,  self-imposed  task,  with  a  heart 
grateful,  not  that  it  is  well  done,  but  that  it  is  finally  done. 


PART  I 

PRINCIPLES 


What  is  Science? 

It  is  the  object  of  this  investigation  to  determine  whether  the 
measurement  of  fire  hazard,  commonly  known  as  fire-rating, 
conforms,  or  can  be  made  to  conform,  to  a  standard  known  as 
science ;  and  with  this  end  in  view  it  becomes  necessary  at  the 
outset  to  reach  a  correct  understanding  of  what  constitutes 
science. 

In  the  light  of  existing  definitions,  we  are  justified  in  regard- 
ing science  as  a  body  of  systematized  and  organized  knowledge. 
As  all  knowledge  exists  in  the  mind  alone,  science,  as  a  part  of 
knowledge,  cannot  exist  outside  of  mind;  and  if  we  would  under- 
stand what  creates  the  difference  between  scientific  knowledge 
and  ordinary  knowledge,  it  will  be  necessary  to  turn  our  atten- 
tion to  mental  processes.* 

It  is  a  startling  conclusion  to  reach  at  the  very  outset,  that 
a  word  which  we  use  every  day  to  describe  an  indefinite  nexus  of 
relations  as  wide  as  the  universe  is  the  name  of  something  that 
exists  only  in  the  mind;  but  it  is  a  conclusion  which  cannot  be 
avoided.  The  word  "science,"  derived  from  the  Latin  verb  scio 
(I  know),  in  its  primary  sense  means  knowing,  or  knowledge. 
It  has  finally  come  to  mean  a  certain  kind  of  knowledge,  which, 
for  the  purposes  of  the  following  investigation,  it  is  necessary  to 
define  in  order  that  we  may  learn  wherein  it  differs  from  ordinary 
knowledge. 

An  eminent  scientist  was  once  asked  what  caused  the  vowel 
qualities  in  speech.  After  many  years  of  investigation,  he  proved 
to  the  world  that  what  is  known  as  tone-color  is  caused  by  the 
shape  of  atmospheric  waves.  At  an  early  stage  in  his  investiga- 
tion he  adopted  this  inference  as  his  working  hypothesis,  but  he 
spent  eight  years  in  accumulating  proof  of  his  inference  before 
he  gave  it  out  to  the  world  as  a  scientific  generalization.     The 

*"  Science  is  a  purely  mental  existence,  and  must  therefore  conform  to  the  laws  of  that 
which  formed  it.  Science  is  in  the  mind,  and  not  in  the  things,  and  the  properties  of  the 
mind  are  therefore  all-important."— Principles  of  Science,  Jevons. 


4      '  ''*  **  *•'*•  *••'  Firc^ Rating  as  a  Science 

mental  processes  which  demonstrated  the  brief  fact  he  announced 
were  scientific,  and  the  fact  itself  may  be  said  to  constitute  a 
molecule  in  the  body  of  organized  knowledge  called  science. 
A  natural  inference  from  this  fact  was,  that  like  atmospheric 
waves  would  produce  like  effects,  and  that  if  these  waves  could 
be  re-created,  the  original  sounds  would  be  reproduced.  Other 
investigators  had  discovered  the  peculiar  properties  of  the  dia- 
phragm in  relation  to  sound-waves.  Others  had  shown  that 
electricity  was  a  species  of  wave  motion,  and  the  way  was  thus 
paved  for  another  kind  of  scientist,  known  as  the  inventor.  One 
inventor  soon  perfected  an  ingenious  apparatus,  through  which 
sound-waves  converted  into  electrical  waves  were  transported  to 
some  distant  point,  and  reconverted  into  the  original  sound- 
waves, and  in  this  way  the  human  voice  could  be  sent  out  through 
space  for  an  unlimited  distance.  Another  inventor  devised  an 
apparatus  through  which  a  vibrating  diaphragm  traced  its  move- 
ments on  a  revolving  cylinder  of  wax,  which  would  reimpart  the 
wave  back  to  the  atmosphere  at  any  time  in  the  future.  This 
apparatus  is  called  the  phonograph,  an  instrument  which  utilizes 
the  original  generalization  in  its  time  relations  as  the  telephone 
utilizes  it  in  its  space  relations.  This  historically  true  recital 
shows  that  the  long  inductive  process  which  revealed  a  scientific 
truth,  and  the  deductive  processes  which  utilized  it  in  its  space 
and  time  relations,  occurred  in  the  mind  alone.  All  waves  have 
doubtless  had  the  quality  of  shape  ever  since  the  morning  stars 
sang  together.  The  fact  itself  existed  millions  of  years  before 
man  or  his  mind  had  been  created,  and  science  simply  converted 
this  fact  into  knowledge,  through  a  long  chain  of  accurate  reason- 
ing. The  telephone  and  phonograph,  born  of  this  knowledge, 
are  not  science,  but  the  products  of  science. 

These  facts  show  that  science  exists  only  in  the  mind,  and 
that  it  is  necessary  to  know  something  of  the  mind  itself  and  its 
modes  if  we  would  learn  what  creates  the  difference  between 
scientific  and  popular  knowledge. 

As  the  body  receives  food  and  sorts  it  out  into  life-giving 
elements,  so  the  mind  receives  impressions  and  sorts  them  out 
into  elements  of  thought  and  knowledge.  To  feel  and  know  are 
the  twin  functions  of  intelligence.     Things  outside  of  the  mind 


What  is  Science?  5 

cause  sensations  in  the  mind.  Like  things  cause  like  sensations, 
and  unlike  things  unlike  sensations.  The  feeling  mind  is  able  to 
detect  the  likeness  in  these  sensations  and  group  or  classify  like 
with  like,  and  store  these  groups  away  in  an  orderly  array  in  the 
memory,  in  about  the  same  way  as  in  a  mercantile  establishment 
a  shipment  of  mixed  merchandise  is  sorted  and  arranged  on 
the  shelves  with  like  merchandise.  If  a  sensation  has  never  been 
felt  before,  neither  the  feeling  nor  the  thinking  mind  can  do  any- 
thing with  it  except  to  put  it  among  the  miscellaneous  stored 
impressions  in  the  memory  until  another  similar  sensation  is  felt, 
when  the  feeling  mind  is  apt  to  note  the  resemblance  and  classify 
the  new  sensation  with  the  old,  as  the  beginning  of  a  classified 
group,  and  as  each  succeeding  sensation  with  similar  character- 
istics is  received,  it  is  automatically  classed  with  this  group.  The 
thinking  mind  occupies  itself  with  establishing  relations  among 
these  sensations;  and  the  oftener  a  given  sensation  is  received, 
the  better  the  mind  is  able  to  determine  the  nature  and  extent  of 
its  relations,  just  as  the  merchant  becomes  more  familiar  with 
each  class  of  goods  he  deals  in  in  proportion  as  he  becomes, 
through  constant  handling,  more  familiar  with  its  relations  to  his 
trade.  The  feeling  mind  does  not  think,  nor  does  the  thinking 
mind  feel — they  simply  co-operate  with  each  other,  each  in  its 
own  way.  The  feeling  mind  classifies  sensations  intuitively.  The 
thinking  mind  never  ceases  "during  business  hours"  to  ponder 
over  these  sensations,  and  establish  their  relations  as  grouped  by 
the  feeling  mind.  In  fact,  it  is  about  as  difficult  for  the  thinking 
mind  not  to  ponder  over  relations  while  it  is  awake  as  it  is  for 
the  eyes  not  to  see  while  open.  As  experience  develops  the 
thinking  mind,  it  begins  to  establish  relations  among  relations 
— to  square  and  cube  relations,  as  it  were — and  these  relations, 
primary,  secondary,  and  tertiary,  are  formulated  into  concepts 
and  ideas,  and  relations  again  established  among  these  concepts 
and  ideas;  and  as  these  relations  become  more  and  more  complex 
and  wider  in  scope,  they  become  less  and  less  definite;  in  other 
words,  more  abstract,  just  as  in  a  large  mercantile  establishment 
the  clerk  in  charge  of  a  counter  may  know  the  contents,  quality, 
and  price  of  the  goods  on  every  shelf  and  in  every  box  in  his 
charge,  while  the  department  head  has  simply  a  general  idea  of 


6  Fire-Rating  as  a  Science 

the  stock  on  hand  in  his  department,  and  the  proprietor,  knowing 
little  or  nothing  of  details,  has  a  comprehensive  knowledge  of 
the  business  as  a  whole. 

This  analogy  may  be  considered  crude,  but  the  mind  has  been 
compared  by  many  eminent  authorities  to  a  sorting  and  relation- 
ing  machine;  and  by  general  consent  it  is  admitted  by  every 
modern  psychological  authority  that  the  brain,  as  an  organism 
in  its  most  general  functional  aspect,  is  concerned  solely  with 
classifying  and  establishing  relations — that  all  thinking  is  rela- 
tioning,  and  that  all  knowledge  consists  of  establishing  relations 
of  each  thing  or  group  of  things  with  as  many  things  or  groups 
of  things  as  our  perceptive  and  reasoning  faculties  are  able  to 
establish  in  proportion  to  individual  intelligence  and  experience. 
It  is  obvious  that  science,  as  a  body  of  organized  knowledge,  is 
in  like  manner  built  upon  conceptual  relations.  It  is  important 
that  this  fact  should  be  carefully  noted,  because  if  fire-rating  is 
or  is  to  become  a  science,  it  cannot  differ  from  other  science  by 
ignoring  relations.  On  the  contrary,  the  greater  the  number  and 
the  more  exact  the  relations  it  is  able  to  establish,  the  nearer  it 
will  approximate  to  science. 

It  is  obvious  that  the  relations  established  by  the  reasoning 
faculties  are  relations  among  sensations  which,  themselves,  are 
simply  interpretations  of  changes  in  our  consciousness  called 
feelings,  which  are  generated  primarily  by  things  outside  of 
mind,  and  secondarily  by  the  interaction  of  parts  within  the 
mind  itself.  But  sensations  themselves,  as  well  as  the  mental 
faculties  which  sort  and  arrange  them,  are  modified  by  the  per- 
sonal equation  found  in  each  individual,  and  further  modified  in 
each  individual  by  temporary  bodily  conditions.  The  same  tem- 
perature is  warm  to  the  Esquimau  and  cold  to  the  Hottentot, 
and  it  may  be  cold  to  the  same  person  at  one  time  and  hot  at 
another,  according  to  the  rate  of  circulation  of  the  blood. 
Again,  the  temperature  may  be  both  hot  and  cold  at  the  same 
time  to  the  same  individual.  If  we  turn  on  the  hot  and  cold 
water  faucets  in  a  wash-basin,  holding  a  hand  under  each  while 
the  water  is  running,  when  we  plunge  both  hands  into  the  water 
in  the  basin  it  will  feel  cold  to  one  hand  and  warm  to  the  other. 
We  soon  become  oblivious  to  an  odor,  or  to  the  ticking  or  strik- 


What  is  Science?  7 

ing  of  a  clock.  The  sense  of  taste  is  purely  relative;  sweets  are 
more  sweet  after  acids  and  acids  more  tart  after  sweets.  Light 
is  blinding  after  darkness  arid  darkness  more  dark  after  light. 
Every  sensation  is  itself  related  to  bodily  conditions  or  to  mental 
conditions,  known  as  moods,  which  themselves  are  logically  the 
results  of  an  interaction  between  mind  and  body.  These  facts 
show  that  both  the  body  and  the  mind  are  varying  criteria  with 
relation  to  relations  and  the  sensations  on  which  these  relations 
are  based. 

"  In  all  their  various  kinds  and  compounds,  what  we  call  relations  can 
be  to  us  nothing  more  than  modes  in  which  we  are  affected  by  bringing 
together  sensations,  or  remembered  sensations,  or  both." 

This  universality  of  relationship  is  further  shown  by  the 
structure  of  language,  through  which  all  ideas  are  exchanged. 
Every  sentence  must  contain  a  subject  and  a  predicate,  which 
are  related  to  each  other.  Every  rational  proposition  must 
express  some  relation;  or  again  quoting  from  the  same  authority: 

"  It  must  assert  the  manner  in  which  two  things  are  related  to  each 
other,  as  resembling  or  differing,  and  to  what  extent,  as  successive  or  simul- 
taneous in  time  or  conjoined  in  space,  and  whether  invariably  so."  * 

The  word  "rational"  indicates  a  reasonable  ratio  or  relation 
in  a  statement  compared  with  known  facts.  The  word  '*rate," 
which  indicates  the  price  of  fire  insurance,  is  derived  from  the 
same  root,  and  in  like  manner  signifies  a  reasonable  relation. 

"  The  ascertainment  of  what  a  thing  is  or  is  not  signifies  the  ascertain- 
ing of  what  things  it  is  like  or  not  like — what  class  it  belongs  to 

Likeness  of  relation  is  the  intuition  common  to  reasoning  and  classification, 
and  it  results  in  one  or  the  other  according  as  the  relations  thought  of  are 

partial  or  total Every  ratiocinative  act  is  the  indirect  establishment 

of  a  definite  relation  between  two  things  by  a  process  of  establishing  a 

definite  relation  between  two  definite  relations All  reasoning  is  the 

indirect  establishment  of  a  definite  relation  between  two  things."! 

Admitting  that  the  form  of  mental  activity  known  as  reason- 
ing has  to  do  exclusively  with  relations,  we  find  that  all  words 
used  to  denote  different  kinds  of  reasoning  indicate  shades  or 
gradations  in  the  relative  certainty  of  the  reasoning  process. 
The   words  *'guess,"    "surmise,"    "hypothesis,"    "inference," 

♦Fallacies,  A.  Sedgwick. 

t  Principles  of  Psychology,  Herbert  Spencer. 


8  Fire-Rating  as  a  Science 

^'analogy,"  ''prognostication,"  "prevision,"  "prophecy,"  etc., 
embrace  an  ascending  scale  of  certainty  or  definiteness  with 
regard  to  undetermined  relations,  and  the  word  "truth,"  which  is 
the  focus  toward  which  all  these  words  point,  signifies  finally 
established  relations  between  or  among  things. 

Lest  it  be  thought  that  too  much  stress  has  been  laid  upon 
classification  and  the  establishment  of  relations  which  constitute 
the  processes  that  create  all  knowledge,  it  is  proper  to  say  that 
a  principle  is  involved  which  is  vital  to  this  inquiry.  The  extent 
to  which  we  have  ignored  classification  and  relations  marks  not 
only  how  far  fire-rating  has  departed  from  science,  but  how  far 
it  has  departed  from  the  methods  inherent  in  all  intelligence. 

So  far  no  difference  has  been  established  between  the  methods 
which  create  science  as  distinguished  from  ordinary  knowledge. 
It  is  admitted  that  "any  department  of  inquiry  where  a  number 
of  like  facts  can  be  collected  and  systematized  may  be  made  into 
a  science";  hence  the  difference  does  not  exist  in  the  raw 
material  out  of  which  both  kinds  of  knowledge  are  fashioned. 
The  fact  remains,  however,  that  knowledge  in  general  has  been 
immeasurably  expanded  by  science — that  civilization  has  been 
lifted  out  of  a  "bestial,  unsocial,  perpetually  fighting  and 
unfathomably  superstitious  stage  of  savagery,"  and  the  unaided 
senses  enabled  "to  explore  a  universe  compared  with  which  the 
earth  is  a  grain  of  sand,  and  to  detect  the  structure  of  a  monad, 
compared  with  which  a  grain  of  sand  is  an  earth,"  by  the  system- 
atized and  organized  knowledge  known  as  science. 

It  is  further  admitted,  that,  as  found  in  high  stages  of  civili- 
zation, knowledge  in  general  is  largely  the  result  of  a  slow  assimi- 
lation of  science  by  the  people,  and  that  a  legitimate  contrast 
between  science  and  common  knowledge  unaffected  by  science 
can  be  instituted  only  through  a  comparison  with  utter  savagery; 
for  even  in  semi-civilizations  we  find  traces  of  the  effects  of 
science  in  the  use  of  crude  mechanical  contrivances  and  in  a 
certain  rude  comprehension  of  fundamental  principles.  Making 
all  due  allowance,  however,  for  the  science  embodied  in  popular 
knowledge  as  found  in  high  civilizations,  there  still  remains  a 
yawning  gulf  between  the  definiteness,  accuracy,  and  reach  of 
science  and  the  vague  and  limited  knowledge  of  ordinary  people. 


What  is  Science?  9 

This  difference  exists,  notwithstanding  the  fact  that  science 
itself  is  most  ready  to  admit  that  it  is  saturated  with  error,  and 
that  its  reasoning  processes  must  still  utilize  guess,  surmise, 
hypothesis,  analogy,  and  all  the  lower  forms  of  reasoning,  in  its 
unending  struggle  toward  the  higher  forms  of  reasoning.  Indeed, 
the  strength  of  science  might  be  said  to  lie  in  the  fact  that  its 
indirect  mission  is  to  detect  fallacy  as  the  negative  side  of  its 
real  mission  to  discover  truth.  As  the  vast  difference  between 
scientific  and  ordinary  knowledge  does  not  arise  from  any  funda- 
mental difference  in  reasoning  processes,  or  in  the  raw  material 
which  generates  these  processes,  we  must  seek  the  cause  of  this 
difference  in  some  fundamental  thesis.  This  thesis  consists  in 
the  affirmation  by  science  of  the  uniformity  of  nature  as  mani- 
fested in  the  laws  of  mind  and  matter.  Science  does  not  recog- 
nize that  chance  can  exist.  It  contends  that  things  outside  of 
mind  are  obedient  to  the  laws  imposed  upon  them,  and  that  the 
mind,  by  being  obedient  to  the  laws  imposed  upon  it,  can  put 
itself  in  harmonious  relations  with  things  and  their  relations 
which  exist  outside  of  itself;  that  the  nearer  it  comes  into  har- 
mony with  its  own  laws  the  better  it  can  establish  the  complete 
harmony  found  only  in  the  relation  known  as  truth.* 

It  should  be  remembered,  however,  that  this  fundamental 
thesis  of  science  is  itself  the  result  of  an  evolution  which  began 
with  the  first  inference  that  nature  was  uniform  in  some  specific 
way.  The  proof  of  this  uniformity  established  science  to  that 
extent  only,  and  to-day  science  is  evolving  with  equal  gait  in 
proportion  as  uniformities  are  established  through  the  discovery 
of  natural  laws.  Science  makes  it  its  business  to  search  out  and 
prove  this  uniformity  in  nature,  and  to  describe  it  for  the  use  and 
behoof  of  humanity.  In  this  search  it  utilizes  all  forms  of  reason- 
ing, but  it  uses  every  form  as  provisional,  pending  proof. 

So  far  as  the  familiar  properties  of  things  are  concerned, 
ordinary  knowledge  is  not  only  sufficiently  correct  for  practical 
purposes,  but  in  some  respects  is  more  available  for  immediate 
use  than  scientific  knowledge.  We  expect  a  given  effect  from 
a  given   cause,   and   our  anticipation   is  verified  with  sufficient 

*  "  Where  chance  seems  to  work,  it  is  our  deficient  faculties  which  prevent  us  from  recog- 
nizing the  operation  of  law  and  design."— Principles  of  Science,  Jevons. 


lo  Fire- Rating  as  a  Science 

accuracy  for  every-day  purposes.  The  perceptive  and  reasoning 
faculties,  through  guess,  surmise,  inference,  etc.,  create  skill, 
expertness,  shrewdness,  acumen,  and  other  requisites  to  what 
the  world  calls  success.  But  ordinary  intelligence  does  not 
methodically  seek  for  generalizations  except  as  it  imbibes  them 
through  maxims,  apothegms,  epigrams,  mottoes,  "wise-saws," 
etc.,  which  constitute  a  sort  of  rudimentary  body  of  organized 
knowledge  of  half-truths  for  daily  use.  Ordinary  reasoning  is 
content  to  infer  from  repeated  experience  that  bodies  fall,  with- 
out seeking  to  know  the  law  of  gravitation,  or  that  water  is  use- 
ful for  lavatory  purposes  or  extinguishing  fire,  without  seeking  to 
know  the  laws  of  hydraulics.  It  might  be  said  that  ordinary 
intelligence  has  no  conception  that  uniform  laws  govern  these 
phenomena,  or  that  such  a  thing  as  knowledge  of  these  laws 
exists. 

On  the  other  hand,  science  recognizes  that  these  laws  must 
exist  in  every  manifestation  of  nature,  and  it  is  its  acknowledged 
mission  to  search  out  the  natural  laws  which  underlie  phenomena. 
At  the  point  where  scientific  reasoning  separates  from  popular 
reasoning,  science  begins  carefully  to  observe  things  in  their 
relations,  and  collect  facts,  with  the  end  in  view  of  grouping 
these  facts  into  a  broader  fact  which  will  describe  more  than  one 
relation,  and  to  extend  this  general  fact  into  a  final  generalization 
which  will  describe  all  allied  relations  and  the  phenomena  result- 
ing from  them.  The  process  which  leads  up  to  this  generaliza- 
tion is  called  inductive  reasoning.  When  a  generalization  has 
been  tested  and  verified  as  true  under  all  circumstances,  it 
becomes  an  established  natural  law,  and  science  begins  to  use 
this  as  a  means  of  foretelling  what  will  occur  under  its  con- 
ditions. The  process  of  reasoning  from  a  generalization  of  this 
kind  to  the  results  which  may  be  expected  to  flow  from  it  is 
called  deductive  reasoning.  It  may  be  said,  however,  that  many 
sciences  have  never  advanced  beyond  inductive  reasoning,  and 
that  in  even  the  most  advanced  sciences  a  constant  process  of 
induction  is  maintained  along  with  deduction;  for  every  pro- 
gressive science,  in  gathering  material  for  use  in  formulating  new 
generalizations  and  broadening  its  established  generalizations 
as  a  means  of  wider  and  more  accurate  research,  must  avail  itself 


What  is  Science?  ii 

of  the  entire  gamut  of  reasoning,  from  the  hypothesis  which  might 
be  called  an  induction  in  its  incipient  stage  to  the  final  proof 
which  is  the  end  of  all  reasoning. 

The  infinitude  of  relations  existing  among  things  has  been 
grouped  by  science  under  two  heads — relations  of  quality  and 
relations  of  quantity;  and  as  either  of  these  may  exist  simultane- 
ously or  in  succession,  they  are  again  divisible  into  relations  of 
coexistence  and  relations  of  sequence. 

All  intelligence  progresses  by  imperceptible  degrees  from 
automatic  or  unconscious  reasoning  into  conscious  reasoning, 
which  becomes  more  conscious  in  proportion  to  the  novelty  and 
complexity  of  the  relations  dealt  with.  This  is  illustrated  by  the 
laborious  efforts  of  the  novice  in  music,  compared  with  the  per- 
formance of  the  finished  artist,  which  requires  little  or  no  con- 
scious reasoning.  In  proportion  as  we  learn  to  do  things  at  first 
difficult,  the  necessity  for  conscious  reasoning  diminishes.  Most 
of  our  bodily  and  mental  functions,  learned  with  more  or  less 
conscious  reasoning  in  infancy  or  youth,  become  seemingly 
intuitive  in  the  fact  that  the  mind  acts  with  an  ease  and  celerity 
which  defies  analysis.  This  is  illustrated  in  speech,  reading,  and 
the  simpler  arithmetical  calculations.  For  the  reasons  stated,  it 
is  difficult  to  differentiate  purely  intuitive  processes  from  reason- 
ing which  is  performed  so  rapidly  as  to  elude  consciousness. 
Among  the  seemingly  intuitive,  or  at  least  unconscious,  reasoning 
faculties  of  the  mind  is  the  ability  to  recognize  identity  in  quality 
or  quantity.  Viewed  in  another  way,  this  ability  might  be  con- 
strued into  an  inability  to  detect  differences  in  either  quality  or 
quantity  when  these  differences  are  so  slight  as  to  be  indistin- 
guishable to  our  perceptive  faculties  or  feelings.  Be  this  as  it 
may,  we  are  able  to  recognize  substantial  identity  or  sameness 
in  quality  or  quantity  seemingly  by  intuition.  Qualitative  reason- 
ing is  a  lower  grade  of  reasoning  than  quantitative,  and  always 
precedes  it  in  the  growth  of  intelligence;  in  fact,  every  act  of 
quantitative  reasoning  is  qualitative  in  its  initial  stage,  because 
where  differences  in  quality  become  measurable,  they  become 
quantitative  in  proportion  to  their  measurability.  The  measure- 
ment of  quantitative  differences  is  a  function  of  conscious  rea- 
soning,  and  is  one  of   the   chief   ends   of   science,   which   first 


12  Fire-Rating  as  a  Science 

seeks  to  know  what  kind  of  phenomena  will  occur,  then  in  what 
degree.* 

The  story  of  the  primitive  farmer  who  weighed  his  hog  by- 
balancing  a  rail  across  a  fence,  tying  the  hog  to  one  end  of  the 
rail  and  a  stone  to  the  other,  and  then  guessing  at  the  weight  of 
the  stone,  will  serve  to  illustrate  the  advance  from  qualitative  to 
quantitative  reasoning.  The  farmer,  in  the  absence  of  any  other 
standard  of  comparison,  selected  a  stone. f  Experiments,  let  us 
assume,  revealed  that  other  hogs  weighed  more  or  less  than  the 
stone,  but  that  stone  and  hog  could  be  made  to  balance  by  shift- 
ing the  fulcrum  of  the  rail.  The  marks  on  the  under  side  of  the 
rail,  occasioned  by  the  friction  of  repeated  weighings,  would 
naturally  suggest  the  existence  of  some  ratio  between  the  relative 
lengths  of  the  two  ends  of  the  rail  used  as  a  scale-beam,  and  this 
would  lead  to  the  inference  that  by  changing  the  fulcrum  a 
relation  would  be  established  between  the  weight  of  the  stone 
and  the  weight  of  any  hog.  Finally,  the  law  was  established  that 
the  numerical  relation  between  the  one  weight  and  its  arm  was 
equal  to  the  numerical  relation  between  the  other  arm  and  its 
weight.  Ingenuity  suggested  improvements.  Graduated  weigh- 
ing-scales were  devised  and  improved,  until  the  descendants  of 
the  original  fence-rail  and  stone  may  be  found  in  every  chemist's 
laboratory  to-day,  in  the  delicate  balances  which  will  measure 
the  weight  of  an  eyelash.  This  oft-told  tale  shows  how  knowl- 
edge advances  from  the  qualitative  to  the  quantitative.  The 
hog  and  the  stone  had  the  quality  of  weight  in  common,  and  the 
problem  was  to  find  the  relative  quantity  of  weight  in  each.  The 
notches  in  the  rail  revealed  the  fact  that  weight  was  measurable 
in  degrees  of  quantity.  Successive  improvements  in  weighing 
devices  have  reduced  quantitative  measurement  of  weight  into 
constantly  diminishing  differences,  until  in  the  physicist's  scales 
we  see  an  instrument  which  will  detect  extremely  minute  differ- 
ences; while  the  astronomer  with  his  torsion  balance  is  able  to 
weigh  the  moon  or  the  planet  Jupiter.  From  the  farmer's  original 
experiment  in  ponderation,  quantitative  measurement  of  the  force 

♦"The  accurate  ascertainment  of  quantity  as  well  as  quality  marks  the  difference 
between  the  lower  and  higher  stages  of  positive  knowledge.'' — Principles  of  Psychology, 
Herbert  Spencer. 

fThe  word  "stone  "  is  still  used  in  England  for  a  varying  weight,  which,  according  to 
the  thing  weighed,  may  stand  for  five,  eight,  fourteen,  sixteen,  or  thirty-two  pounds. 


What  is  Science?  13 

of  gravitation,  otherwise  known  as  weight,  has  slowly  evolved; 
but  to  the  farmer's  experiment,  or  some  similar  reasoning  pro- 
cess, is  due  the  discovery  of  the  fact  that  gravitation  is  measur- 
able, for  previous  to  this  experiment,  humanity  had  simply  been 
conscious  of  the  fact  that  one  thing  pulled  downward  harder  than 
another,  without  the  means  of  knowing  how  much  harder. 

To-day  we  have  no  science  of  smell,  taste,  or  touch.  We 
know  that  a  thing  smells  rank  or  fragrant,  but  not  how  much  so. 
We  know  that  a  given  substance  tastes  sweet  or  sour,  or  that  it 
is  hard  or  soft,  smooth  or  rough,  but  we  have  no  scale-beam  by 
which  we  can  change  these  qualities  into  measurable  quantities. 

"  Human  knowledge  becomes  scientific  in  direct  ratio  with  the  measur- 
ability  found  in  phenomena.  Space  is  measurable,  hence  the  science  of 
geometry.  Force  and  space  are  measurable,  hence  statics.  Time,  force, 
and  space  are  measurable,  hence  dynamics.  The  scale  measurement  of 
heat  through  the  thermometer  gave  birth  to  thermostatics;  and  it  is  the 
reduction  of  phenomena  to  scale  measurement  that  gives  to  any  branch  of 
knowledge  its  degree  of  scientific  accuracy."* 

The  growth  of  quantitative  reasoning  is  shown  by  the  inven- 
tion of  money  as  an  instrumentality  to  measure  relations  in  the 
abstract  quality  known  as  value. 

As  the  farmer's  experiment  was  a  crude  attempt  to  estimate 
the  weight  relations  between  a  specific  hog  and  stone,  so  it  was 
long  possible  for  men's  minds,  through  a  process  known  as 
barter,  to  agree  upon  the  relative  value  between  an  ox  and  a 
goat,  or  a  sheep  and  a  chicken;  but  a  standard  that  possessed  the 
same  value  to  all  men  was  needed  for  measuring  the  relative 
value  of  all  things,  just  as  standards  were  needed  to  establish 
relations  in  the  qualities  known  as  weight,  heat,  time,  space, 
etc.,  which  are  now  established  quantitatively  through  weighing- 
scales,  thermometer,  clock,  and  yard-stick.  This  standard,  for 
which  at  various  times  and  places  men  have  utilized  sheep,  kine, 
tobacco,  tea,  peltry,  poultry,  and  many  other  things,  finally 
crystallized  into  money,  which  has  become  the  world's  acknowl- 
edged instrumentality  for  measuring  relations  in  value.  But  men 
have  not  yet  ceased  to  quarrel  as  to  whether  or  not  the  standard 
itself  ought  to  possess   the  abstract  quality  of  value  which  it 

♦Genesis  of  Science,  Herbert  Spencer. 


14  Fire-Rating  as  a  Science 

measures.  For  centuries  past,  waves  of  theory  as  to  the  true 
relations  of  money  to  value  have  swept  the  civilized  world,  which 
goes  to  show  how  difficult  it  is  for  scientific  reasoning  to  con- 
vince popular  reasoning  of  the  true  relations  existing  among 
things  when  prejudices  have  been  once  aroused. 

Common  knowledge  is  to  some  extent  quantitative  within 
certain  indefinite  limits.  On  the  other  hand,  the  most  exact 
quantitative  measurements  of  science  do  not  reach  the  absolute 
truth,  but  only  a  closer  approximation  to  it.  Common  knowl- 
edge knows  that  to-day  is  warmer  than  yesterday — the  ther- 
mometer tells  us  how  many  degrees  warmer.  Common  knowledge 
knows  that  the  days  are  longer  in  June  than  in  December — the 
chronometer  tells  us  the  difference  in  hours,  minutes,  and  sec- 
onds. Common  knowledge  knows  that  one  thing  is  heavier  than 
another — the  scales  tell  us  how  many  pounds  and  ounces.  Still, 
with  the  most  delicately  adjusted  thermometers,  chronometers, 
and  scales,  we  are  able  to  establish  only  an  approximation  to  the 
actual  difference  in  heat,  time,  and  weight. 

In  the  popular  conception,  a  second  stands  for  the  ultimate 
unit  of  time,  but  a  second  is  about  as  far  removed  from  mstan- 
taneousness  as  it  is  from  eternity.  The  extreme  violet  ray  in  the 
spectroscope  is  caused  by  763,000,000,000,000  vibrations  in  a 
second.  There  are  31,536,000  seconds  in  a  year;  hence  the 
time  consumed  by  one  of  the  vibrations  which  produce  the 
familiar  color  known  as  violet  is  to  a  second  as  a  second  is  to 
24,200,000  years.  Lest  these  figures  might  be  supposed  to  be 
but  a  mere  surmise,  it  is  proper  to  state  the  curious  fact,  admitted 
by  all  scientists,  that  the  undulations  of  light,  although  incon- 
ceivably rapid  and  small,  admit  of  more  accurate  measurement 
than  waves  of  any  other  kind. 

"  The  most  exact  sciences  have  slowly  developed  an  ability  to  determine 
quantities  not  directly  measurable  or  determinable  to  the  unaided  senses, 
by  a  slow  process  of  growth  extending  through  thousands  of  years."  * 

While  science  never  ceases  to  utilize  inductive  reasoning  in 
its  search  for  more  exact  and  comprehensive  generalizations, 
deductive  reasoning  and  the  measurement  of  quantitative  differ- 

*Genesis  of  Science,  Herbert  Spencer. 


What  is  Science? 


15 


ences  with  increasing  nicety  constitute  the  goal  toward  which 
every  science  is  striving. 

All  sciences  in  their  beginnings  are  qualitative,  and  the  first 
generalization  of  every  science  must  be  empirical.  No  science, 
however  perfect,  may  be  said  to  be  entirely  free  from  empirical 
assumptions  or  unexplained  phenomena.  Many  sciences  have 
had  an  accidental  beginning.  A  phenomenon  which  would  have 
been  meaningless  to  ordinary  intelligence  has  been  apprehended 
by  scientific  intelligence  and  yoked  into  the  service  of  humanity. 
Neither  can  any  science  be  said  to  be  complete,  for  every  science 
has  occasion,  from  time  to  time,  to  discard  or  enlarge  the 
generalizations  it  has  outgrown. 

There  is  no  patent  law  to  protect  the  proprietary  rights  of 
science  in  the  natural  laws  it  discovers.  Every  scientific  generali- 
zation becomes  the  common  property  of  mankind  as  a  free  gift, 
and  every  science  is  constantly  broadening  and  perfecting  its 
own  generalizations  through  knowledge  obtained  from  the 
generalizations  of  other  sciences.  In  this  way  ''each  science  has 
become  in  turn  an  art  to  other  sciences." 

This  has  been  the  attitude  of  science  toward  humanity,  but 
the  attitude  of  humanity  toward  science  has  been  an  attitude  of 
studied  contempt  or  sullen  distrust.  When  a  scientific  generali- 
zation has  been  crystallized  into  concrete  shape  as  an  invention 
which  can  be  put  to  daily  use,  ordinary  intelligence  is  quick  to 
see  the  practical  benefits,  but  its  attitude  toward  the  generali- 
zation itself  is  that  of  a  shying  horse  toward  a  newspaper  that 
happens  to  lie  in  its  road.  With  ordinary  intelligence,  '*use  is 
one  thing  and  understanding  another."  Built  up  solely  of  per- 
sonal experiences,  it  comprehends  abstract  truths  with  such 
difficulty  that  it  refuses  even  to  make  an  effort  to  grasp  anything 
approaching  a  broad  and  far-reaching  law  of  nature.  It  can  only 
understand  an  abstract  truth  when  reduced  to  concrete  form  by 
illustration.  It  goes  on  doing  things  the  way  it  was  taught,  and 
questions  the  morality  of  doing  otherwise.  It  cannot  imagine 
better  methods,  however  obvious,  than  its  own.  It  is  loose  in 
reasoning  and  inexact  in  statement.  Its  modesty  is  shocked  in 
the  presence  of  naked  truth,  and  cold  facts  give  it  the  shivers. 
It  is  quick  to  jump  at  conclusions  which  accord  with  its  precon- 


1 6  Fire-Rating  as  a  Science 

ceived  notions,  and  it  is  so  positive  in  its  belief  that  it  might  be 
said  to  be  a  part  of  its  religion  not  to  permit  itself  to  be  con- 
vinced against  its  will.  It  cannot  deliberate  or  suspend  judg- 
ment, or  balance  evidence,  or  in  the  least  understand  how  an 
hypothesis  can  be  framed  as  a  basis  for  reasoning,  pending  proof 
or  disproof.  It  is  true  that  this  represents  the  popular  intelli- 
gence found  in  the  mob,  but  it  is  partially  true  of  the  higher 
order  of  intelligence  found  among  cultivated  people.  Every 
individual  character  has  its  partial  enlightenment,  its  hilltops  of 
intelligence  illumined  by  the  light  of  knowledge,  and  its  valleys 
which  lie  in  the  eternal  shades  of  ignorance.  Our  so-called 
culture  is  a  thing  of  lights  and  shades.  Most  of  us  are  educated 
into  an  understanding  of  the  uniformity  of  natural  law  in  some 
things,  but  cannot  bring  ourselves  to  believe  that  this  uniformity 
pervades  every  manifestation  of  nature  if  we  will  but  seek  it. 
Epictetus  stated  an  eternal  verity  when  he  said,  "Even  when  full- 
grown,  we  appear  as  children,  for  a  child  in  music  is  he  who  hath 
not  learned  music,  and  in  letters  one  who  hath  not  learned 
letters,  and  in  life  one  undisciplined." 

In  fine,  it  may  be  stated  that  science  represents  a  school  of 
thought  based  upon  an  abiding  faith  in  the  uniformity  of  nature 
and  nature's  laws,  a  school  which  has  freely  yielded  up  its  treas- 
ures to  humanity ;  but  unfortunately  humanity  has  inherited  from 
its  forebears  a  rooted  prejudice  against  natural  laws,  which  have 
an  irreverent  way  of  toppling  over  the  sacred  edifice  of  popular 
opinion  from  time  to  time;  and  it  is  not  yet  quite  safe  to  one's 
business  reputation,  even  in  the  most  enlightened  business 
circles,  to  suggest  the  utilization  of  a  natural  law  for  business 
purposes. 


Natural  Laws  Defined 

The  difference  between  scientific  and  popular  knowledge  is  so 
largely  the  result  of  a  systematic  search  for  and  utilization  of 
natural  laws,  that  it  is  important  to  understand  the  distinction 
between  these  laws  and  the  rules  of  conduct  promulgated  through 
statutes,  ordinances,  codes,  and  creeds.  Natural  laws,  so-called, 
are  simply  formulae  stating  an  invariable  order  of  coexistence  or 
sequence  among  phenomena.* 

These  formulae  differ  from  human  laws  in  being  descriptive, 
and  not  prescriptive.  There  have  been  many  definitions  of 
natural  law,  but  the  following,  from  the  Grammar  of  Science, 
by  Karl  Pearson,  professor  of  applied  mathematics  and  mechan- 
ics, University  College,  London,  is  perhaps  the  best: 

"Other  laws  are  valid  only  for  a  special  community  at  a  special  time. 
The  scientific  law  is  valid  for  all  normal  human  beings,  and  is  unchangeable 
so  long  as  their  perceptive  faculties  remain  at  the  same  stage  of  develop- 
ment  The  discovery  of  some  single  statement,  some  brief  formula, 

from  which  the  whole  group  of  facts  is  seen  to  flow,  is  the  work,  not  of  a 
mere  cataloguer,  but  a  man  endowed  with  a  creative  imagination.  The 
single  statement,  the  brief  formula,  the  few  words  of  which  replace  in  our 
minds  the  wide  range  of  relationships  between  isolated  phenomena,  is  what 
we  term  scientific  law.  Such  a  law,  relieving  our  memory  from  the  burden 
of  individual  sequences,  enables  us,  with  the  minimum  of  intellectual  fatigue, 

to  grasp  a  vast  complexity  of  natural  or  social  phenomena When 

from  a  sufftcient,  if  partial,  classification  of  facts  a  simple  principle  has  been 
discovered  which  describes  the  relationship  and  sequences  of  any  group, 
then  this  principle  or  law  itself  generally  leads  to  the  discovery  of  a  still 
wider  range  of  hitherto  unregarded  phenomena  in  the  same  or  associated 
fields 

"The  progress  of  science  lies  in  the  continual  discovery  of  more  and 
more  comprehensive  formulae,  by  aid  of  which  we  can  classify  the  relation- 
ships and  sequences  of  more  and  more  extensive  groups  of  phenomena. 
The  earlier  formulae  are  not  necessarily  wrong.  They  are  what  the 
mathematician  would  term  *  first  approximations,*  in  which  we  neglect 
certain  small  quantities.    Then  we  need  a  widening,  not  a  rejection,  of 

♦In  popular  language,  the  word  "  phenomenon  "  signifies  something  supernatural.  In 
science,  the  word  is  used  to  indicate  tne  effect  produced  upon  our  consciousness  by  any 
external  agency. 


1 8  Fire-Rating  as  a  Science 

natural  law,  and  the  earlier  formulae  are  merely  replaced  by  others,  in 
which  briefer  language  describes  more  facts." 

The  law  of  gravitation  formulated  by  Sir  Isaac  Newton  states 
that,  "Any  two  masses  in  the  universe  attract  each  other  with 
a  force  which  varies  according  to  the  inverse  square  of  the  dis- 
tance."  For  over  two  hundred  years  this  law  has  stood  without 
change  as  the  limit  of  comprehensive  description  in  the  fewest 
possible  words.  Speaking  of  it,  Paul  du  Bois  Reymond  says: 
"Here  is  the  limit  to  our  possible  knowledge."  Yet  this  law  is 
the  result  of  over  two  thousand  years  of  evolution,  arising,  per- 
haps, in  the  myth  that  the  sun-god  hitched  up  his  steeds  every 
morning  and  drove  across  the  firmament. 

Brief  as  the  law  of  gravitation  is,  it  is  surpassed  in  brevity 
by  other  natural  laws  of  equal  import.  The  law  of  conservation 
tells  us  in  a  few  words  that  there  is  nothing  lost  in  the  universe; 
that  all  is  change,  and  not  destruction.  Nature,  like  a  thrifty 
housewife,  saves  every  scrap  of  matter  and  energy  for  future  use. 
The  perishability  of  matter  was  long  a  favorite  theme  with 
moralists,  and  in  theory,  at  least,  it  is  the  causa  causorum  in  fire 
insurance;  but  if  it  were  possible  to  inclose  a  burning  building 
in  an  air-tight  crucible  until  consumed,  it  would  be  found  that 
the  ashes  and  gases  would  weigh  the  same  as  the  original  build- 
ing and  contents;  in  other  words,  that  matter  had  been  changed, 
but  not  destroyed.  The  real  destruction  by  the  burning  of  a 
building  is  a  destruction  of  value^  which  is  a  property  of  matter, 
hence  it  is  value  alone  that  we  insure  or  can  insure.  The  law  of 
conservation  was  not  formulated  until  long  after  fire  insurance 
became  a  recognized  industry.  Knowledge  of  this  law  in  the 
beginning  might  have  exercised  an  important  influence  on  the 
future  of  the  industry,  by  showing  underwriters  as  well  as  their 
patrons,  to  say  nothing  of  judges,  juries,  and  law-makers,  what 
it  is  that  fire  insurance  really  insures.  Perhaps  more  care  might 
have  been  taken  in  wording  policies  to  show  that  they  insured 
the  values  existing  in  things,  and  not  things  themselves.  How- 
ever, as  fire  insurance  has  never  knowingly  availed  itself  of  a 
single  scientific  generalization,  there  is  no  reason  to  believe  that 
the  law  of  conservation  would  have  received  more  attention  than 
other  natural  laws  with  which  its  daily  functions  are  even  more 
closely  implicated. 


The  Relativity  of  Knowledge 

Of  the  generalizations  established  by  science,  that  which 
states  that  all  knowledge  is  relative  has  the  most  immediate  and 
important  bearing  upon  the  question  before  us;  for  if  true,  it 
follows  that  the  problem  of  fire-rating  has  to  do,  not  with  things 
themselves,  but  with  their  relations.  This  generalization  is  so 
startling  in  its  simplicity  of  statement,  and  so  far-reaching  in  its 
significance,  as  to  be  almost  appalling  to  the  average  mind  when 
first  brought  to  realize  its  full  import.  Yet,  as  stated  by  Sir 
William  Hamilton,  "It  is  perhaps  the  truth  of  all  others  most 
harmoniously  re-echoed  by  every  philosopher  of  every  school." 

At  the  outset,  we  encounter  the  unavoidable  inference  that  if 
all  knowledge  is  relative,  each  individual  mind  as  a  whole  must 
exist  as  a  relation  to  everything  outside  of  it,  and  in  its  analysis 
as  a  labyrinth  of  interrelations  among  its  parts;  in  other  words, 
the  mind  might  be  called  an  inner  universe  of  related  concepts 
created  by  an  outer  universe  of  related  manifestations. 

"We  infer  that  in  all  consciousness  there  must  be  a  subject,  or  person 
who  is  conscious,  and  an  object,  or  thing  of  which  he  is  conscious.  There 
can  be  no  consciousness  without  the  union  of  these  two  faculties;  and  in 
this  fact  we  are  met  by  a  relation,  for  each  exists  only  as  it  is  related  to  the 

other The  subject  is  a  subject  only  in  so  far  as  it  is  conscious  of  an 

object.    The  object  is  an  object  only  so  far  as  it  is  apprehended  by  a  sub- 
ject, and  the  destruction  of  either  is  the  destruction  of  consciousness  itself."  * 

So  far  as  this  life,  at  least,  is  concerned,  we  know  that  the 
complex  organism  known  as  the  mind  cannot  exist  without  con- 
sciousness, for  consciousness  is  to  the  mind  what  the  vital  prin- 
ciple is  to  matter.  The  sensations  we  experience  are  primary, 
undecomposable  states  of  consciousness,  and  to  realize  the  rela- 
tivity of  knowledge  it  is  only  necessary  to  regard  the  mind, 
structurally,  as  a  conscious  center  in  our  anatomy  where  sensa- 
tions are  felt.     This  conscious  spot,  or  sensorium,  is  confined 

*  First  Principles,  Herbert  Spencer. 

19 


20  Fire-Rating  as  a  Science 

within  a  narrow  dungeon  known  as  the  skull,  where  it  receives 
news  from  outside  through  innumerable  thread-like  fibers  known 
as  sensory  nerves,  which  spread  out  to  the  surface  of  the  body  in 
five  groups.  These  nerves  convey  sensations  to  different  spots 
in  the  sensorium,  through  molecular  vibrations  caused  by  things 
of  which  we  become  conscious  only  through  these  nerve  vibra- 
tions, which  create  the  sensations  recognized  by  us  as  sight, 
hearing,  touch,  taste,  and  smell.  It  belongs  to  psychology  to 
describe  how  the  reasoning  faculties  sort,  classify,  and  arrange 
the  sensations  delivered  to  the  sensorium,  and  reason  out  their 
relations  to  each  other,  and  store  away  these  reasoned-out  rela- 
tions as  mental  concepts,  and  how  this  stock  of  stored  concepts, 
with  the  relations  established  among  them,  constitute  each  indi- 
vidual intellect. 

Summed  up,  the  mind  of  man  might  be  regarded  as  a  lone 
prisoner  in  a  camera  obscura^  isolated  from  the  outer  world  by 
impenetrable  walls,  and  dependent  for  all  it  knows  of  things 
themselves  upon  the  vibrations  conveyed  to  it  through  thread- 
like fibers.  When  these  fibers  are  healthy  and  well  trained,  they 
give  us  pretty  accurate  notions  of  the  relations  of  things^  but  of 
things  themselves^  nothing.  "Life  itself  is  definable  as  the  con- 
tinuous adjustment  of  internal  relations  to  external  relations."* 

This  is  discouraging  to  the  man  who  is  constitutionally 
unable  to  bring  himself  to  believe  that  he  is  not  always  "in  the 
right,"  though  it  may  be  said  for  his  consolation  that  the  rela- 
tions established  by  correct  reasoning  processes  in  normal  minds 
furnish  us  with  all  the  information  we  need  in  actual  life,  pro- 
vided we  exercise  a  reasonable  degree  of  caution  in  judging  of 
the  news  received  through  innumerable  and  infinitesimal  vibra- 
tions in  our  wholly  unintelligent  and  often  unreliable  nerve 
messengers. 

"  If  every  act  of  knowledge  is  the  formation  of  a  relation  in  conscious- 
ness parallel  to  a  relation  in  environment,  then  the  relativity  of  knowledge 
is  self-evident.  Thinking  being  relationing,  no  thought  can  ever  express 
more  than  relations.  And  here  let  us  not  omit  to  mark  how  that  to  which 
our  intelligence  is  confined  is  that  with  which  alone  our  intelligence  is  con- 
cerned. The  knowledge  within  our  reach  is  the  only  knowledge  that  could 
be  of  service  to  us.    This  maintenance  of  a  correspondence  between  the 

♦First  Principles,  Herbert  Spencer. 


The  Relativity  of  Knowledge  21 

internal  action  and  external  action,  which  both  constitutes  our  life  at  each 
moment  and  is  the  means  whereby  life  is  continued  through  subsequent 
moments,  merely  requires  that  the  agencies  acting  upon  us  shall  be  known 
in  their  coexistences  and  sequences,  and  not  that  they  shall  be  known  in 

themselves Deep  down,  then,  in  the  very  nature  of  life,  the  relativity 

of  knowledge  is  discernible.  The  analyses  of  vital  action  in  general  lead 
not  only  to  the  conclusion  that  things  in  themselves  cannot  be  known  to  us, 
but  also  to  the  conclusion  that  knowledge  of  them,  were  it  possible,  would 
be  useless."  * 

Had  the  task  been  imposed  upon  a  finite  intelligence  to  con- 
struct a  being  who  should  be  in  sentient  communication  with  all 
things,  it  is  inconceivable  how  this  intelligence  could  have 
accomplished  its  task  in  any  way  other  than  by  starting  every- 
thing in  the  universe  in  vibration,  and  then  constructing  a  sen- 
sorium  responsive  to  every  vibration.  It  is  this  "one  touch  of 
nature"  that  "makes  the  whole  world  kin,"  and  enables  us  all, 
Itke  Socrates,  to  say,  "I  am  a  citizen  of  the  universe." 

It  would  be  wrong  to  infer  from  the  doctrine  of  the  relativity 
of  knowledge  that  science  does  not  for  all  practical  purposes 
accept  things  as  real.  Indeed,  it  might  be  said  that  modern 
science  owes  its  very  existence  to  its  final  acceptance  in  good 
faith  of  the  admission  that  all  knowledge  is  relative.  When  the 
long  empirical  inquiry  of  speculative  philosophy  into  the  nature 
of  noumena,  or  things  themselves,  ended  in  the  frank  admission 
that  the  mind,  by  its  very  constitution,  could  know  things  only 
in  their  manifestations  or  phenomena,  science  began  to  turn  its 
attention  to  a  practical  study  of  the  relations  among  appearances 
or  manifestations  of  things,  and  then,  for  the  first  time,  began  to 
realize  that  there  need  be  no  limits  to  its  aspirations  in  the 
investigation  of  phenomena. 

It  is  a  maxim  of  jurisprudence  that  circumstantial  evidence 
may  be  the  strongest  evidence.  It  might  be  said  that  the  scien- 
tist depends  entirely  upon  circumstantial  evidence  regarding 
actualities,  and  through  this  evidence  science  is  now  pouring  a 
flood  of  light  into  the  dark  recesses  of  the  unknown,  and  rev^eal- 
ing  to  humanity  for  the  first  time  in  the  world's  history  truths 
that  are  incontrovertible. 

If  we  compare  the  circumstantial  evidence  on  which  so-called 

♦First  Principles,  Herbert  Spencer. 


22  Fire-Rating  as  a  Science 

truths  are  established  in  our  courts  of  law  with  the  evidence  on 
which  scientific  truths  are  founded,  we  find  an  overwhelming 
preponderance  in  favor  of  the  latter.  The  Scriptures  declare 
that  *'all  testimony  shall  be  established  out  of  the  mouths  of  two 
witnesses,"  but  science  has  five  witnesses  which  corroborate  each 
other  in  arithmetical  ratio.  When  two  of  these  senses  confirm 
each  other,  they  may  be  said  to  constitute  the  two  scriptural 
witnesses;  but  memory  multiplies  these  witnesses,  for  each 
repetition  in  experience  of  a  given  sense-impression  becomes  an 
additional  witness.  This  makes  an  endless  array  of  corrobo- 
rating testimony,  for  the  mind  groups  the  relations  among  these 
sense-impressions  into  innumerable  concepts.  So  long  as  con- 
cepts clash,  there  is  doubt;  when  they  agree,  they  establish  an 
unbreakable  chain  of  circumstantial  evidence,  so  long  as  the  laws 
of  mind  have  not  been  violated.  Add  to  this  array  of  concepts 
the  sense-impressions  of  other  intelligences  formulated  into  con- 
cepts, and  we  have  a  resistless  array  of  testimony  concerning 
relations  which  constitutes  scientific  proof.  An  ordinary  mind 
is  prone  to  accept  the  evidence  of  a  single  sense  on  a  single 
occasion ;  the  scientist,  on  the  contrary,  is  of  all  men  least  given 
to  constructing  hard-and-fast  rules  based  upon  insufficient  evi- 
dence. While  his  generalizations  are  admittedly  based  upon 
circumstantial  evidence,  it  is  his  business  to  challenge  every  bit 
of  evidence,  until  the  chain  of  demonstration  is  complete,  before 
he  admits  an  established  law  of  nature,  and  even  then  he  recog- 
nizes it  simply  as  an  hypothesis  which  has  not  been  disproved. 
On  the  other  hand,  it  is  wrong  to  regard  a  scientist  in  the  light 
of  an  ordinary  skeptic,  for  science  has  its  credo  as  well  as  the- 
ology. The  faith  of  the  scientist  does  not  end  with  a  mere 
declaration  of  belief,  for  he  is  the  reverent  disciple  of  truth  for 
truth's  sake.  The  foundation  of  his  creed  is  an  abiding  faith  in 
certain  a  priori  truths,  which  are  not  the  result  of  reasoning,  but 
of  intuition. 

As  stated  by  Aristotle,  "The  beginning  of  demonstration  can- 
not be  demonstration,  nor  the  beginning  of  science  science;  and 
when  there  is  no  other  truth,  intuition  must  be  the  beginning  of 
science." 

The  scientist  recognizes  as  one  of  the  fundamental  laws  of 


The  Relativity  of  Knowledge  23 

mind  that  a  preliminary  hypothesis  is  as  necessary  for  the  mind 
to  reason  upon  as  food  is  necessary  before  the  stomach  can 
digest.  He  accepts  certain  assumptions  as  a  priori  which,  though 
in  themselves  incapable  of  proof,  are  the  basis  of  all  science,  and 
constitute  the  things  about  which  science  reasons.  He  believes 
in  a  rationally  constructed  universe  of  which  he  as  a  part  is  a 
rational  being.  He  believes  in  his  own  existence,  and  that  he  is 
a  thinking  being,  because  he  can  separate  himself  from  his  sen- 
sations and  hold  them  before  himself  for  contemplation.  He 
believes  in  the  existence  and  validity  of  the  laws  of  thought  as 
unchangeable  and  universal,  and  that  to  think  according  to  these 
laws  is  to  think  correctly.  He  assumes  that,  within  the  limits  of 
his  reasoning  faculties,  the  universe  is  capable  of  being  under- 
stood by  the  application  of  these  laws,  as  otherwise  it  would  be 
useless  to  try  to  understand  anything.  He  believes  that  all 
objects  he  can  reason  about  are  related  together  as  substances 
and  attributes.  He  believes  that  every  beginning  or  change  of 
existence  has  a  cause,  and  that  no  effect  can  be  thought  of  apart 
from  its  cause.  He  believes  in  a  universe  created  with  a  design, 
that  nature  is  uniform  and  consistent  with  itself,  and  that  the 
object  of  science  is  to  study  and  know  that  design  as  manifested 
to  his  reasoning  faculties.  He  believes  that  error  cannot  exist 
in  things  themselves,  but  only  exists  in  the  mind  which  creates 
it  through  a  wrong  interpretation  of  the  manifestations  of 
actualities. 


Symbols 


We  have  spoken  of  the  mind  as  a  prisoner  under  sentence 
of  solitary  confinement  for  life,  pondering  over  the  reports  it 
receives  through  its  news-bearers,  sorting  and  storing  these 
reports  as  classified  data  for  the  establishment  of  relations  and 
inferences;  and  thrice  blessed  is  it  when  these  inferences  reveal 
to  it  a  natural  law  from  which  it  can  forecast  with  certainty 
a  wide  range  of  relations.  But  the  mind's  nerve-messengers, 
though  more  or  less  unreliable,  are  amazingly  active  and  acute, 
and  every  sane  mind  soon  becomes  cognizant  of  other  solitary 
prisoners,  like  itself,  confined  in  other  dungeons  of  the  great 
prison-house  of  life,  and  it  begins  to  try  to  establish  communi- 
cation with  them.  This  communication  is  established  by  means 
of  signs  or  symbols,  which,  like  the  pitiful  expedient  of  the  little 
girl's  rag  baby,  are  made  to  do  duty  for  the  real  thing;  and  thus 
are  we  "such  stuff  as  dreams  are  made  of,"  for  our  symbols  are 
largely  words  which,  unfortunately,  are  not  always  as  definite  as 
the  rag  baby.  But  the  exchange  of  intelligence  by  means  of 
symbols  is  about  the  most  continuous  and  important  function 
of  life,  and  the  necessity  for  this  exchange  follows  us  from  the 
cradle  to  the  grave.  The  simplest  exchange  of  intelligence 
illustrates  the  relativity  of  knowledge,  and  our  utter  dependence 
upon  symbols  as  the  only  means  of  intercourse  between  mind 
and  mind. 

Let  us  suppose  that  the  importing  house  A,  in  Chicago,  tele- 
graphs its  Paris  correspondent,  B,  to  cancel  a  written  order  en 
route.  A  reaches  for  his  desk-telephone,  changes  the  switch- 
board, and  "rings  up"  the  stenographer.  The  stenographer  sees 
from  the  switch-board  that  A  is  calling  her,  takes  her  note-book 
and  records  the  dispatch  in  short-hand,  then  transcribes  her 
notes  on  a  typewriting  machine  and  rings  for  a  messenger,  who 
delivers  the  message  at  the  telegraph  office,  where  it  is  ticked  off 
by  dots  and  dashes  to  New  York,  then  rewritten  by  the  receiving 

24 


Symbols  25 

operator  and  sent  to  the  cable  operator,  who  repeats  the  message 
to  Paris  by  the  needle-code  of  the  cable  company.  At  Paris  the 
message  is  written  on  a  delivery-blank  and  sent  to  B,  who,  on 
receipt  of  the  dispatch,  pulls  the  cord  of  his  book-keeper's  call- 
bell  and  tells  him  in  French  to  cancel  A's  order.  The  book- 
keeper crosses  off  from  his  books  the  entry,  and  tells  the  porter 
in  German  not  to  send  the  goods.  An  analysis  of  this  every-day 
transmission  of  intelligence  shows  that  it  is  accomplished  through 
a  series  of  symbols  converted  into  vibrations,  and  of  vibrations 
converted  into  symbols. 

A  consults  his  switch-board  to  find  the  symbol  for  his  stenog- 
rapher, and  advises  her  that  she  is  wanted  through  vibrations 
imparted  by  a  push-button,  which  starts  an  electrical  vibration 
in  a  wire  which  sets  the  stenographer's  bell  in  vibration.  This 
in  turn  imparts  a  vibration  to  the  atmosphere  which  sets  the  ear- 
drum of  the  stenographer  in  vibration,  which  starts  a  vibration  in 
the  nerve-messengers,  which  finally  communicate  to  her  senso- 
rium  the  news  that  her  bell  is  ringing.  The  symbol  on  the 
stenographer's  switch-board  shows  her  that  she  is  wanted  by  A, 
who  dictates  his  message  into  his  desk-telephone  through  a  pro- 
cess beginning  with  his  rhythmic  breathing,  which  sets  his  vocal 
cords  in  vibration ;  this  starts  the  air  in  vibration,  which  sets  the 
diaphragm  in  the  telephone  in  vibration,  which  in  turn  sets  up  an 
electric  vibration  in  the  wire.  This  starts  the  diaphragm  at  the 
stenographer's  end  of  the  telephone  into  vibration,  which  imparts 
the  original  sound-waves  back  to  the  atmosphere,  and  these  start 
the  ear-drum  of  the  stenographer  in  vibration,  which  sets  her 
sensory  nerves  into  the  complicated  vibration  necessary  to  trans- 
late to  her  sensorium  the  original  words.  If  we  follow  the 
message  "from  start  to  finish,"  we  shall  find  a  long  series  of 
waves  and  symbols  through  which  the  intelligence  is  finally 
delivered  that  cancels  the  order.  The  vibrations  beginning  in 
the  breathing  apparatus  of  A,  in  Chicago,  and  ending  in  the 
sensorium  of  the  German  porter  at  Paris,  pass  through  flesh, 
blood,  nerve  and  brain  tissue,  ether,  atmosphere,  and  solid 
metal  as  media.  The  symbols  beginning  at  A's  switch-board, 
and  continued  through  his  spoken  word  symbols,  are  transmuted 
into  short-hand  symbols,  then  into  symbols  printed  on  the  type- 


26  Fire-Rating  as  a  Science 

writing  machine,  then  into  the  dot-and-dash  symbols  of  the 
telegraph  company,  then  into  needle-code  symbols,  then  into 
written-word  symbols  in  English,  then  into  spoken-word  symbols 
in  French,  then  into  a  sign  symbol  made  by  the  book-keeper  to 
show  that  the  order  is  canceled,  and  finally  into  German  word 
symbols  spoken  to  the  porter.  We  have  thus  a  long  and  complex 
chain  of  causation  set  in  play  through  a  variety  of  symbols  borne 
upon  a  variety  of  waves  through  a  variety  of  media  half-way 
around  the  world,  in  order  to  communicate  a  simple  mental  con- 
cept from  one  mind  to  another. 

This  suppositive  case  not  only  illustrates  the  universal  use  of 
symbols  as  a  means  of  exchanging  thought,  but  shows  that  two 
minds  cannot  communicate  without  an  exchange  of  symbols  of 
some  kind.  Whether  by  gesture,  facial  expression,  pictures, 
signs,  words  (spoken,  written,  or  printed),  or  mere  sounds,  sym- 
bols constitute  the  sole  means  through  which  thought  is  trans- 
ferred from  mind  to  mind.  Without  these  symbols  two  minds 
would  be  as  unresponsive  to  each  other  as  trees,  running  brooks, 
or  stones;  for  it  is  only  the  poet  who  finds  "tongues  in  trees," 
*'books  in  running  brooks,"  or  "sermons  in  stones.' 

Every  symbol  represents  a  mental  concept,  and  mental  con- 
cepts are  created  by  the  relations  established  by  the  reasoning 
faculties  from  perceptions  which  are  caused  by  the  molecular 
quiverings  in  microscopic  fibers  called  nerves.*  Hence  the  knowl- 
edge of  every  mind  consists  of  the  relations  it  has  been  able  to 
establish  and  label  with  the  symbols  by  which  they  may  be  recog- 
nized and  utilized  in  the  exchange  of  thought  with  other  minds. 
It  is  a  significant  fact  in  proof  of  the  relativity  of  knowledge, 
that  the  only  sciences  which  are  universally  denominated  exact, 
speak  through  a  language  composed  entirely  of  arbitrary  sym- 
bols. Mathematics  and  logic  are  classed  by  every  authority 
among  the  exact  sciences,  and  the  reason  they  are  exact  lies  in 
the  fact  that  they  do  not  profess  to  deal  with  things,  but  con- 
fine themselves  exclusively  to  the  relations  among  things.  The 
reasoning  process  of  every  mathematical  calculation  is  conducted 

*"  The  average  thickness  of  nerve-fiber,  as  stated  by  Alexander  Bain,  is  about  one  six- 
thousandth  of  an  inch,  and  at  the  extremities  of  the  nerves  the  axis  or  core  divested  of  its 
envelope  does  not  exceed  one  hundred-thousandth  of  an  inch  in  thickness."— Principles  of 
Science,  Jevons. 


Symbols  27 

through  symbols,  consisting  of  figures,  letters,  arbitrary  signs, 
and  diagrams,  while  in  logic  the  syllogism  which  forms  its  corner- 
stone as  a  science  consists  in  a!  mathematical  formula  of  thought- 
relations.  Two  thousand  years  ago  Epictetus,  in  answer  to  one 
who  offered  to  resolve  him  a  syllogism,  said,  "Slave,  your  syllo- 
gism is  the  measuring-rod — it  is  not  the  thing  measured." 
Words  and  symbols  may  be  as  widespread  as  a  language,  or 
confined  to  a  small  area,  as  a  town,  village,  or  even  a  single 
home,  for  every  family  has  its  own  words,  signs,  and  gestures 
which  are  unintelligible  to  others,  and  in  like  manner  every  com- 
mercial house  has  similar  symbols  which  are  understood  by  its 
employees  alone.  Every  calling  is  compelled  to  manufacture 
its  own  word  symbols  to  express  mental  concepts  in  every-day 
use;  and  as  Balzac  truly  says,  "Every  trade  has  its  a^-got.'' 

The  value  of  a  thought  symbol  consists  in  its  capacity  to 
express  the  most  complete  mental  concept  in  the  most  vivid, 
comprehensive,  and  definite  manner.  Before  alphabets  were 
invented,  all  written  language  consisted  of  pictures  or  diagrams. 
An  interesting  phase  in  the  evolution  of  language  is  to  be  seen  at 
present  in  the  tendency  to  revert  to  ideographic  language  as  a 
means  of  expressing  thought  which  cannot  be  conveyed  by  words. 
A  long  chain  of  vivid  and  complicated  thought  is  frequently 
conveyed  by  a  series  of  pictures.  The  renaissance  of  ideographic 
language  is  shown  by  the  marked  increase  in  illustrations  found 
in  books,  magazines,  and  daily  journals.  There  is  also  evidence 
of  an  increasing  use  of  the  diagram  as  a  means  of  showing  coex- 
istent and  sequential  relations  which  cannot  with  economy  of 
thought  be  conveyed  by  words  or  figures.  As  stated  by  an  emi- 
nent mathematician,  "A  curve  of  no  great  complexity  may  give 
the  whole  history  of  the  variations  of  value  in  a  troublesome 
mathematical  expression."  The  daily  papers  report  the  markets, 
foot-ball,  base-ball,  yachting,  and  golfing  contests,  battles,  horse- 
races, and  weather  records  by  graphic  diagrams,  instead  of  by 
columns  of  printed  description,  as  was  the  custom  a  few  years 
ago.  There  is  also  an  increased  us  of  the  diagram  in  socio- 
logical and  economic  investigation.  The  daily  papers  frequently 
contain  pages  of  news  almost  entirely  symbolic,  outside  of  regu- 
lar printed  matter,  and  the  symbolic  matter  is  in  every  case  not 


28  Fire-Rating  as  a  Science 

only  more  brief,  comprehensive,  and  intelligible,  but  conveys 
thought  that  cannot  be  economically  conveyed  by  printed  words. 

We  find  the  same  tendency  to  an  increased  use  of  ideographic 
symbols  in  commerce.  Comparative  diagrams  are  now  recog- 
nized as  a  legitimate  auxiliary  in  every  branch  of  commercial 
activity. 

As  the  function  of  all  reasoning  is  to  establish  relations  of 
coexistence  and  sequence,  and  as  a  true  understanding  of  these 
relations  constitutes  the  whole  problem  of  fire-rating,  the  dia- 
gram will  be  utilized  in  subsequent  chapters  as  a  means  of 
showing  relations  which  cannot  be  shown  by  ordinary  statistics. 


Standards 

The  Constitution  of  the  United  States  confers  upon  Congress 
the  power  to  coin  and  regulate  the  value  of  money  and  fix  stand- 
ards of  weights  and  measures.  As  the  coining  and  regulation  of 
money  is  to  fix  standards  of  value,  it  follows  that  the  Constitu- 
tion practically  confers  upon  Congress  the  authority  to  fix  stand- 
ards of  values,  weights,  and  measures.  The  power  to  fix  these 
standards  has  been  inherent  in  all  governments  from  a  time  long 
before  the  "shekel  of  the  sanctuary"  mentioned  in  the  Bible  to 
the  present.  In  Greece  and  Rome  similar  standards  were  main- 
tained, and  Saxon  standards  were  kept  at  Winchester  before  the 
year  950  A.  D.  At  the  present  time  these  standards  are  fixed  by 
all  civilized  nations,  and  preserved  with  a  care  equaled  only  by 
the  care  of  the  national  treasury.  The  advantages  of  world 
standards  are  so  obvious  that  during  recent  years  an  international 
congress  has  established  the  metric  system,  and  the  standards 
adopted  by  this  congress  are  now  preserved  at  the  International 
Metric  Bureau  at  Paris,  copies  being  furnished  to  seventeen 
nations  which  participated  in  the  establishment  of  these  stand- 
ards and  contribute  to  the  expense  of  their  maintenance. 

Again,  all  civilized  governments  have  agreed  in  girdling  the 
globe  with  imaginary  lines  of  latitude  and  longitude  for  the  com- 
mon use  of  humanity,  and  these  lines  are  simply  standards. 

As  before  stated,  the  aim  of  every  science  is  to  establish 
exact  measurement;  but  when  we  come  to  analyze  measurement 
we  find  it  to  consist  of  a  comparison  of  one  thing  with  another, 
and  this  comparison  is  useless  unless  we  know  not  only  what  the 
thing  compared  with  is,  quantitatively,  but  that  it  is  fixed  and 
unchanging — it  must  be  a  constant  standard. 

As  stated  by  a  well-known  authority: 

"  The  real  beginning  of  exact  knowledge  or  science  lies  in  measuring, 

and  a  faithful  observer  of  nature  is  always  occupied  in  measurement 

All  measurements  are  carried  out  by  the  use  of  a  standard To  meas- 

29 


30  Fire-Rating  as  a  Science 

ure  any  quantity  we  need  another  quantity  of  the  same  kind There 

must  be  something  which  does  not  change  with  regard  to  its  surroundings, 
or  measurements  are  impossible."  * 

All  measurement  might  be  analyzed  into  measurements  of 
matter,  time,  space,  energy,  and  motion,  and  the  measurement 
of  phenomena  in  one  of  these  may  be  translated  to  our  senses 
through  the  phenomena  of  another.  Gravitation,  which  is  a  form 
of  energy,  and  invisible,  is  translated  to  the  senses  through  a 
scale-beam  which  is  visible.  Heat  and  time,  which  are  invisible, 
are  measured  by  the  scale  of  the  thermometer,  or  by  the  dial  of 
the  clock.  In  every  case  measurement  is  established  from  a  fixed 
standard  that  is  purely  arbitrary.  The  zero  point  of  the  ther- 
mometer is  a  standard  arbitrarily  selected  within  the  boundaries 
of  heat;  and  so  in  measuring  phenomena  of  all  kinds  we  must 
select  some  point,  line,  position,  or  attribute  as  our  standard. 

These  facts  constitute  another  illustration  of  the  relativity  of 
all  knowledge,  and  additional  proof  that  in  the  problem  of  fire- 
rating  we  can  only  establish  relations,  the  problem  being  to  make 
these  relations  consistent  by  reference  to  universally  recognized 
and  unchanging  standards. 

The  universal  necessity  for  established  standards  in  all  meas- 
urement, which  is  recognized  by  every  civilized  government, 
confronts  us  in  the  measurement  of  fire  destruction.  Is  it  a 
measurement  of  time,  space,  energy,  or  motion,  one  or  all?  Is 
it  a  thing  to  be  measured?  If  so,  before  we  can  measure,  we 
must  determine  what  it  is,  and  how  the  measurement  is  to  be 
accomplished,  and  establish  standards  of  comparison  that  will 
not  change. 

We  know  that  fire  is  energy  manifesting  itself  through  an 
intense  form  of  molecular  motion  in  matter,  known  as  combus- 
tion, and  that  all  motion  must  be  measured  with  relation  to  space 
and  time.  Hence  we  have  the  complicated  problem  of  measuring 
the  destruction  of  matter  by  energy  manifested  as  a  form  of  motion 
through  time  and  space^  and  the  additional  problem  of  translating 
our  measurement  into  the  language  of  value^  which  itself  is  meas- 
ured by  a  standard  known  as  money.  This  complex  manifesta- 
tion has  evolved  a  series  of  ratios  in  fire  insurance  which  are  in 

♦Physical  Measurement,  A.  Earle. 


Standards  3 1 

a  state  of  incessant  change;  and  change  is  motion,  hence  we 
cannot  avoid  the  conclusion  that  the  thing  we  have  to  measure 
is  motion  of  some  kind.  If  measured  by  the  methods  of  science, 
we  must  determine  the  kind  of  motion,  and  establish  the  unchang- 
ing standards  without  which  it  cannot  be  measured — this  is  a  sine 
qua  non. 

Note— The  universal  necessity  for  standards  suggests  an  interesting  qnestion  regard- 
ing tlie  present  attitude  of  many  statts  in  their  proscription  of  fire-rating.  In  a  recent  con- 
vention of  the  American  National  Association  of  Chemists,  a  memorial  was  formulated, 
urging  Congress  to  establish  authorized  national  standards  for  chemical  measurements. 
If  fire  destruction  is  a  thing  to  be  measured,  it  would  be  difficult  to  draw  a  line  between  the 
rights  of  chemists  and  fire  underwriters  in  demanding  fixed  standards  necessary  for  their 
measurements.  If  chemists  have  a  right  to  demand  these  standards,  fire  underwriters 
seem  to  have  the  same  logical  right  to  demand  standards  of  underwriting  cost  in  the  shape 
of  an  authorized  national  tariff  of  standard  cost  relations. 


The  Law  of  Rhythm 


The  mewling  infant  must  be  sung  or  rocked  to  sleep.  In  its 
wakeful  hours  it  is  pacified  by  dandling,  patting,  or  "trotting." 
When  it  begins  to  "take  notice,"  its  first  instinct  is  to  pound 
something.  The  most  acceptable  present  to  a  boy  is  a  drum. 
When  he  reaches  the  amatory  age,  he  begins  to  cultivate  poetry, 
music,  and  the  dance.  When  man  has  journeyed  over  the  "ups 
and  downs"  of  life  into  the  valley  of  old  age,  he  chews  the  cud 
of  reflection  in  his  rocking-chair  in  the  chimney-corner.  All  these 
things  show  the  human  instinct  for  rhythmic  motion.  There  is 
not  a  tribe  so  barbarous  that  it  does  not  find  recreation  in  sym- 
bolic chants,  or  dances  to  the  pounding  of  a  hollow  log  or 
tom-tom. 

This  instinct  for  rhythm  has  its  roots  in  a  fundamental  law  of 
nature  which  of  all  others  best  interprets  the  poetry  of  motion  in 
the  drama  of  life.  Other  natural  laws  may  place  us  in  harmoni- 
ous relations  with  space.  This  puts  us  in  touch  with  time,  from 
cradle-song  to  funeral-dirge. 

As  has  been  shown,  all  intelligence  consists  in  establishing 
relations.  These  must  be  relations  either  of  coexistence  or 
sequence ;  in  other  words,  relations  which  exist  at  the  same  time, 
or  relations  which  exist  in  succession.  It  is  impossible  for  a 
finite  mind  to  conceive  of  the  first  great  Cause  creating  a  motion- 
less universe,  a  mere  picture  of  still  life,  for  its  eternal  contem- 
plation. It  is  only  possible  to  imagine  cosmos  as  imbued  with 
life,  motion,  ceaseless  change.  Had  it  been  the  task  of  a  finite 
mind  to  start  this  vast  complexity  of  coexistent  relations,  suns, 
planets,  moons,  comets,  asteroids,  meteors,  nebulae,  star-dust, 
molecules,  and  atoms  in  simultaneous  motion,  and  at  the  same 
time  quicken  all  animate  creation  into  ceaseless  action  and 
reaction,  there  would,  without  doubt,  have  been  a  speedy  "wreck 
of  matter  and  crush  of  worlds." 

Divine  wisdom  accomplished  this  task  through  the  laws  of 

32 


The  Law  of  Rhythm  ^^ 

motion,  which  have  but  recently  crystallized  into  the  generaliza- 
tion known  as  the  undulatory  theory,  or  law  of  rhythm. 

Like  the  law  of  gravitation,  this  generalization  is  the  result 
of  a  long  period  of  evolution  from  more  primitive  formulae.  The 
discovery  by  Helmholtz  of  a  third  property  in  tone-waves  was 
the  missing  link  essential  to  complete  the  chain  of  reasoning 
which  evolved  the  modern  law  of  rhythm.  Previous  to  Helm- 
holtz's  investigations,  any  one  could  see  that  all  waves  upon 
water  surfaces  were  more  or  less  irregular,  that  every  wave  bore 
upon  its  bosom  other  and  smaller  waves.  Helmholtz  discovered 
the  fact  that  atmospheric  waves  were  corrugated  in  like  manner 
by  the  presence  of  lesser  waves,  and  that  these  irregularities 
created  the  difference  between  sounds  of  the  same  pitch,  which 
in  music  is  known  as  tone-color.  This  fact  rounded  out  the  final 
generalization  that  all  waves  possess  the  three  qualities  of  width 
or  amplitude  of  vibration,  rapidity  of  vibration,  and  contour. 

It  was  found  that  there  is  no  such  thing  as  an  absolutely  pure 
tone  unmixed  with  the  presence  of  other  tones,  hence  no  waves 
of  exactly  uniform  bilateral  contour;  just  as,  in  mathematics, 
there  is  no  such  thing  as  an  absolute  point,  straight  line,  or 
circle.  Action  and  reaction  never  exactly  repeat  themselves; 
hence  no  two  wave  shapes  can  be  mathematically  identical.  Aside 
from  the  presence  of  minor  waves  which  produce  what  Helmholtz 
termed  *' upper  tones,"  he  found  other  tones  resulting  from  both 
the  sum  of  and  the  difference  between  two  tone-waves,  which  he 
designated  as  summation  and  differential  tones. 

As  stated  by  Jevons,  '*The  same  phenomena  which  we  find  in 
some  kinds  of  waves  may  be  expected  to  occur  mutatis  mutantis 
in  other  kinds,"  whatever  the  media  through  which  they  are 
transmitted ;  though  scientists  do  not  seem  to  have  availed  them- 
selves of  this  suggestive  fact  as  a  clew  to  the  mysterious  mani- 
festations of  wave-motion,  which  possibly  cause  some  of  the 
phenomena  that  furnish  the  stock  in  trade  of  telepathy,  the- 
osophy,  hypnotism,  spiritualism,  voodooism,  etc. 

In  a  tentative  way,  science  is  beginning  to  investigate  these 
phenomena.  The  hypothesis  of  aetheric  vibrations  proved  the 
kinship  among  the  phenomena  of  light,  heat,  electricity,  and 
magnetism,  and  possibly  at  some  time  in  the  future,  aetheric  wave 


34  Fire-Rating  as  a  Science 

contours  and  resultants  may  furnish  a  valid  hypothesis  regarding 
some  of  the  faint  manifestations  of  vibratory  force,  which  are  at 
present  left  to  the  undisputed  possession  of  charlatanism. 

The  final  law  of  rhythm  is  the  joint  offspring  of  the  generali- 
zation that  all  matter  is  in  ceaseless  motion,  and  of  the  so-called 
first  law  of  motion  formulated  by  Galileo  more  than  four  hundred 
years  ago.  This  law  stated  that  a  moving  body  must  forever 
continue  in  a  straight  line,  with  uniform  velocity.  The  process 
of  reasoning  which  finally  developed  this  simple,  and  to  ordinary 
intelligence  incredible,  generalization  into  the  law  of  rhythm  is 
so  clearly  stated  by  Professor  Fiske,  in  his  Outlines  of  Cosmic 
Philosophy,  that  I  take  the  liberty  of  quoting  at  some  length 
from  that  work. 

"As  a  single  moving  body  in  an  otherwise  empty  universe  would  move 
forward  forever  with  unvarying  velocity  in  an  unvarying  direction,  so,  on 
the  other  hand,  two  or  more  bodies  moving  in  independent  directions  and 
exerting  attractive  forces  upon  each  other  must  forever  move  in  directions 
which  rhythmically  vary,  and  with  velocities  which  are  rhythmically  aug- 
mented and  diminished.  Thus  the  rhythm  of  motion  is  a  corollary  from 
the  persistence  of  force.  Our  alternatives  are  rhythm  or  invariable  velocity 
in  one  invariable  direction.  The  latter  alternative  being  excluded  by  the 
fact  that  in  the  known  universe  innumerable  bodies  coexist,  it  follows  that 
we  must  adopt  the  former,  and  admit  that  all  motion  is  rhythmical.  .... 
Thus  in  all  cases,  whether  molar  or  molecular,  the  rhythm  of  motion  is 
necessitated  by  the  fact  that  in  a  multiform  universe  no  portion  of  matter 

can  move  uninfluenced  by  some  other  portion Forever  throughout 

the  length  and  breadth  of  cosmos  we  find  periodicity,  rise  and  fall,  recur- 
rence of  maxima  and  minima.  This  is  the  law  of  all  motion  whatever, 
whether  exemplified  by  a  star  rushing  through  space,  or  by  the  leaf  which 
quivers  in  the  breeze,  by  the  stream  of  blood  which  courses  through  the 
arteries,  or  by  the  atom  of  oxygen  that  oscillates  in  harmony  with  its  com- 
panion atoms  of  hydrogen  in  the  raindrop. 

"  The  forces  which  are  carrying  a  given  portion  of  matter  in  a  given 
direction  become  gradually  altered  in  their  distribution  and  .  in  their 
amounts,  until  the  direction  of  the  motion  is  practically  reversed,  and 
whether  this  given  portion  of  matter  be  a  planet  or  a  molecule,  the  dynamic 
principle  remains  the  same.  Thus,  what  we  may  call  the  elementary 
motion  going  on  throughout  the  world  of  phenomena,  the  elementary 
motion  by  which  the  various  combinations  of  which  all  'perceptible  motions 

are  made  up,  are  all  rhythmical  or  oscillatory Light,  heat,  electricity, 

and  magnetism  are  the  product  of  a  perpetual  trembling  or  swaying  to  and 
fro  of  the   invisible  atoms  of  which  visible  bodies  are  composed.  .... 


The  Law  of  Rhythm  35 

According  to  the  latest  chemical  speculations  in  philosophy,  it  is  because  of 
the  synchronous  or  rhythmical  harmony  of  the  oscillatory  movements 
described  by  these  atoms  that  elementary  substances  are  enabled  to  com- 
bine in  myriad-fold  ways,  thus  making  up  the  wondrous  variety  of  forms, 
organic  and  inorganic,  which  the  earth's  surface  presents  for  our  con- 
templation  Since  the  ultimate  particles  of  which  science  regards  the 

universe  as  composed  are  thus  perpetually  swaying  to  and  fro,  in  accordance 
with  the  law  of  motion  that  admits  of  no  exception,  we  may  expect  to  find 
that  the  various  aggregations  of  these  particles  which  constitute  perceptible 
bodies  will  exhibit  a  like  rhythm,  whether  comparatively  simple  or  end- 
lessly compounded  in  their  motions.  The  law  which  governs  the  action  of 
the  parts  must  govern  also  the  action  of  the  whole,  no  matter  how  intricately 
the  whole  may  be  compounded.  Whether  it  be  in  the  case  of  organic  or 
inorganic  bodies,  of  complex  or  simple  aggregates,  we  must  expect  to  come 
upon  systems  of  rhythmical  movement  which  will  be  comparatively  simple 
or  endlessly  complex,  according  to  the  structural  complication  of  the  bodies 
in  question." 

The  law  of  rhythm,  born  of  Galileo's  amazingly  simple  first 
law  of  motion,  manifests  itself  throughout  the  twin  universe  of 
mind  and  matter.*  Every  functional  act  of  life  is  rhythmic;  we 
see,  hear,  taste,  touch,  and  smell  through  rhythm.  We  breathe, 
sleep,  eat,  digest,  act,  and  think  in  rhythm.  We  waver  between 
opinions.  Habits  and  moods  are  but  elongated  waves  of  recur- 
rency.  Poetry,  music,  and  the  dance  create  their  emotional  effects 
through  rhythm.  Every  human  being  is  the  center  and  source 
of  countless  incoming  and  outgoing  vibrations;  and  as  society  is 
but  an  aggregation  of  individual  lives,  it  is  subject  to  the  same 
universal  law,  as  manifested  in  work,  rest,  recreation,  worship, 
in  waves  of  political  sentiment,  religious  revivals,  epidemics  of 
war,  reform,  and  vice;  in  social  agitations,  strikes,  revolts,  and 
even  in  the  infrequent  upheaval  which  we  designate  by  the  word 
"revolution" — a  word  which  in  its  literal  sense  means  a  turning 
around,  about,  or  over. 

In  the  light  of  this  law  of  protean  motion,  one  can  realize  the 
simple  grandeur  of  the  description  of  the  Father  of  Light  as  the  one 
"with  whom  there  is  no  variableness,  neither  shadow  of  turning.'' 

*•*  There  was  a  time  when  it  would  have  been  a  reasonable  induction  that  vegetables 
are  motionless,  and  animals  alone  endowed  with  power  of  locomotion.  We  are  astonished 
to  discover  by  the  microscope  that  minute  plants  are,  if  anything,  more  active  than  minute 
animals.  We  even  find  that  mineral  substances  seem  to  lose  their  inactive  character,  and 
dance  about  with  incessant  motion  when  reduced  to  sufficiently  minute  particles,  at  least 
when  suspended  in  a  non-conducting  medium A  jet  of  water  appears  to  be  a  con- 
tinuous thread,  when  it  is  really  a  wonderfullv  organized  succession  of  small  and  large  drops 
oscillating  in  form." — Principles  of  Science,  Jevons. 


^6  Fire-Rating  as  a  Science 

The  ocean  of  human  activities  is  perturbed  by  waves  of  inde- 
scribable complexity,  caused  by  the  action  and  interaction  of 
both  physical  and  psychical  influences;  hence  the  ordinary  man 
of  affairs  trusts  to  luck,  and  takes  no  pains  to  conceal  his  con- 
tempt for  the  doctrifiaires  who  venture  to  suggest  the  existence  of 
a  fundamental  law  of  recurrence  in  his  world  of  chance  and 
expediency.  In  spite  of  this,  however,  the  law  of  rhythm  is 
slowly  but  surely  coming  into  recognition  as  the  generalization 
with  which  daily  human  interests  are  most  intimately  concerned.* 

♦Not  a  few  of  the  generalizations  of  modern  science  were  anticipated  by  the  great 
imaginative  thinkers  of  former  ages. 

In  his  Phaedo,  Plato  quotes  Socrates  as  describing  the  world  as  a  round  globe,  and  the 
law  of-rhythm  is  referred  to  in  the  following  language: 

'  In  the  universal  opposition  of  all  things  are  there  not  also  two  intermediate  processes 
which  are  ever  going  on  from  one  to  the  other  and  back  again?  ....  If  generation  were 
in  a  straight  line  only,  and  there  were  no  compensation  or  circle  in  nature— no  turn  or 
return  into  one  another, — then  you  know  that  all  things  would  at  last  have  the  same  form, 

and  pass  mto  the  same  state,"  and  there  would  be  no  more  generation  of  them 

All  things,  like  the  currents  in  the  Euripus,  are  going  up  and  down  in  never-ceasing  ebb 
andflow.^^ 


Law  of  the  Wave  of  Fire  Destruction 

As  the  same  thing  cannot,  outside  of  its  own  boundaries,  exist 
in  two  places  at  once,  all  motion  requires  time,  hence  the  rela- 
tions found  in  fire  destruction,  as  a  mode  of  motion  or  change, 
must  be  sequential;  but  it  is  also  a  law  of  nature  that  motion 
itself  is  relative,  and  can  only  be  measured  with  reference  to 
something  else.  As  it  is  material  things  which  are  destroyed, 
or  rather  changed,  by  fire,  we  must  assume  coexistent  -relations 
among  these  things  in  respect  to  their  relative  liability  to  fire, 
in  order  to  establish  measurement  of  the  sequence  found  in 
waves  of  fire  destruction.  These  coexistent  relations  are  purely 
artificial,  established  for  the  purpose  of  measuring,  not  fire 
destruction  itself,  but  the  relative  hazard  of  specific  things  with 
reference  to  each  other  in  their  common  liability  to  this  destruc- 
tion. These  artificial  relations  established  by  our  tariff  system 
will  be  referred  to  later  on;  in  the  mean  time,  we  will  turn  our 
attention  to  the  sequential  relations  of  fire  destruction  inherent 
in  it  as  a  mode  of  motion  or  change. 

As  an  effect  of  innumerable  causes  in  an  orderly  universe 
where  change  is  ceaseless  and  all-pervading,  and  where  chance 
cannot  exist,  fire  destruction  must  be  governed  by  some  funda- 
mental mode  of  motion  susceptible  of  generalization  into  a  natural 
law  which  will  state  in  the  fewest  words  the  most  comprehensive 
description  of  its  sequential  relations.  From  all  experience  we 
know  that  this  generalization  can  never  embrace  all  relations,  for 
generalizations  themselves  are  not  exempt  from  the  law  of 
change. 

As  the  law  of  rhythm  precludes  the  thought  of  anything  mov- 
ing forever  in  an  unvarying  direction,  it  is  an  inevitable  inference 
that  fire  destruction  must  occur  in  waves,  and  our  inquiry  must 
be  directed  to  the  law  of  motion  found  in  these  waves. 

Assuming,  for  illustration,  that  the  classifying  function  which 
begins  and  accompanies  all  intelligence  has  detected  a  similarity 

37 


38  Fire-Rating  as  a  Science 

of  hazard  in  frame  mercantile  buildings  and  contents  sufficient 
to  justify  their  being  grouped  together  in  a  property  class,  and 
that  experience  has  shown  that  out  of  each  one  thousand  such 
hazards,  unexposed  by  other  hazards,  twenty  are  destroyed  by 
fire  each  year,  this  would  give  an  average  life  to  each  building 
of  fifty  years,  or  its  equivalent,  an  average  destruction  each  year 
of  one-fiftieth  of  the  value  of  all ;  hence  any  single  building  of 
the  thousand  would  be  liable  to  an  average  destruction  each  year 
of  two  per  cent  of  its  value ;  but  as  losses  actually  occur,  each 
building  is  also  liable  to  be  totally  destroyed  any  day  during  the 
fifty  years;  or,  on  the  other  hand,  it  may  be  partially  destroyed 
and  repaired  several  times  during  the  period,  the  partial  losses 
aggregating  the  same  as  a  total  loss.  But  the  improbability 
of  these  partial  losses  causing  an  exactly  equal  amount  of  de- 
struction each  and  every  year  for  fifty  successive  years  would 
amount  to  an  impossibility.  Under  the  first  supposition,  the 
total  destruction  would  cause  a  loss  wave  some  one  year  dur- 
ing the  period  amounting  to  the  entire  value  of  the  prop- 
erty. This  might  be  described  as  the  possible  maximum  of 
the  wave,  while  the  remaining  forty-nine  years,  having  no  loss, 
would  show  the  possible  minimum  for  the  remaining  forty-nine 
years. 

In  other  words,  the  possible  wave  fluctuation  ranges  from 
nothing  to  the  entire  value  of  the  property,  and  it  is  the  possi- 
bility of  this  maximum  wave,  or  of  intermediate  waves  of  disas- 
trous proportions,  which  creates  the  necessity  for  fire  insurance 
on  the  part  of  the  individual  property  owner. 

All  motion,  however,  is  relative,  and  can  be  measured  only 
with  relation  to  some  fixed  point  or  line  as  a  standard  of  com- 
parison. In  the  measurement  of  all  waves,  we  have  three  relations 
— their  minimum,  maximum,  and  mean;  and  in  the  loss  wave 
under  consideration  these  would  be : 

Minimum,  no  loss. 
Maximum,  total  value. 

Mean,  the  average  annual  destruction,  which,  as  has  been  stated,  is  two 
per  cent  of  the  value. 

Stated  by  ratios,  the  above  would  be  related  to  each  other 
as  follows : 


Law  of  the  Wave  of  Fire  Destruction  39 

Maximum,  one  hundred  per  cent  of  value. 
Mean,  two  per  cent  of  value. 
Minimum,  no  per  cent  of  value. 

Hence,  stated  by  percentages,  the  wave  for  each  and  every 
building  would  range  from  nothing  to  one  hundred  per  cent  of 
value. 

If  we  now  turn  to  the  second  hypothesis  of  partial  losses,  we 
find  the  probability  of  several  partial  destructions  and  repairs 
to  building  aggregating  one  hundred  per  cent  of  the  value  of  the 
property. 

Assuming  these  partial  losses  to  be 

During  the  tenth  year i  per  cent  of  value. 

During  the  twentieth  year  - 25  per  cent  of  value. 

During  the  thirtieth  year 3  per  cent  of  value. 

During  the  fortieth  year i  per  cent  of  value. 

During  the  fiftieth  year 70  per  cent  of  value. 

Total 100  per  cent  of  value. 

These  losses,  aggregating  the  entire  value  of  the  property, 
cause  a  wave  of  destruction  which  at  no  time  reaches  the  maxi- 
mum, with  a  tendency  to  leave  the  minimum ;  in  other  words,  the 
wave  shows  a  tendency  to  desert  the  two  limit  lines  and  approach 
the  mean  line. 

If  we  now  assume  another  unexposed  building  of  the  same 
class,  with  a  similar  record  of  partial  losses,  the  improbability  of 
these  losses  being  identical  as  to  time  and  amount  would  again 
be  equivalent  to  an  impossibility.  The  wave  limits  of  these  two 
buildings  would  show  a  further  tendency  to  narrow  down  toward 
the  mean  line,  and  the  more  unexposed  buildings  we  assume  the 
more  the  limits  or  boundaries  of  the  wave  line  tend  to  desert  the 
limit  lines  and  approach  the  mean  line;  in  other  words,  as  the 
number  of  separate  and  unexposed  buildings  increases,  the  width 
of  the  wave  decreases. 

On  the  other  hand,  if  we  place  two  of  these  unexposed  build- 
ings side  by  side  where  one  fire  will  destroy  both,  it  is  obvious 
that  the  average  life  of  each  building  will  be  shortened  one-half, 
and  as  we  add  one  building  after  another  to  the  group,  this  aver- 
age will  be  steadily  reduced,  until  with  the  fifty  buildings  grouped 
together  into  one  hazard  the  life  of  each  will  be  shortened  from 


40  Fire-Rating  as  a  Science 

its  average  of  fifty  years  to  one  year,  and  if  the  buildings  should 
be  reinstated  after  each  annual  destruction  we  would  have  a  wave 
of  loss  reaching  the  maximum  line  each  year. 

From  this  process  of  reasoning  we  are  able  to  establish  the 
formula  that  the  wave  of  annual  fire  destruction  tends  to  approach 
its  mean  in  inverse  ratio  of  the  amount  of  property  exposed  to  a 
single  conflagration  to  the  total  value  of  all  property. 

While  meteorological  conditions  and  the  diverse  motives  which 
constitute  moral  hazard  tend  to  increase  loss  waves,  both  these 
influences  are  themselves  subject  to  the  law  of  recurrency  found 
in  all  wave  motion,  and  if  their  waves  were  superimposed  upon 
the  physical  wave  itself,  the  above  generalization  would  remain 
true  as  to  the  sequential  phenomena  of  loss  waves. 

If  it  were  possible  to  parcel  out  all  property  liable  to  fire 
destruction  into  unexposed  hazard  units  of  say  one  thousand 
dollars  each,  including  all  property  in  all  civilized  countries,  the 
wave  of  fire  destruction  from  all  causes,  moral  and  physical, 
would  in  all  probability  approach  and  remain  so  close  to  the  mean 
line  as  to  become  inconsequential  as  a  wave;  and  the  same  result 
would  probably  follow  in  the  territorial  area  of  the  United  States 
could  we  parcel  out  all  property  into  unexposed  hazard  units  of 
one  hundred  dollars  each.  Hence  we  would  be  justified  in  stat- 
ing a  law  of  sequence  in  fire  destruction  in  the  following 
language : 

Waves  of  fire  destruction  tend  toward  reduced  width  of  vibration 
in  proportion  as  property  is  segregated  into  smaller  unexposed  values. 

This  law  is  recognized  in  one  respect  by  the  principle  of  dis- 
tributed lines  observed  by  every  well-regulated  company;  but  later 
on  we  shall  find  that  it  is  implicated  with  other  and  equally 
important  features  of  fire  insurance.  As  stated  by  Jevons,  "Laws 
or  principle^  which  appear  to  be  absurdly  simple  and  evident 
when  first  noticed,  reappear  in  the  most  complicated  and 
mysterious  j^rocesses  of  scientific  method." 

If  we  turn  our  attention  to  the  relation  of  fire  insurance,  as 
an  industry,  to  the  wave  of  fire  destruction,  it  is  obvious  that 
this  wave,  as  a  cause,  creates  the  necessity  for  the  industry  as  an 
effect.  For  a  moneyed  consideration,  fire  insurance  capital 
agrees  to  shield  the  individual  property  owner  in  his  relation  to 


Law  of  the  Wave  of  Fire  Destruction  41 

the  wave  of  fire  destruction.  As  has  been  shown,  that  which 
compels  the  property  owner  to  insure  is  his  liability  to  disastrous 
waves  which  destroy  the  value  in  his  property,  in  whole  or  in 
part.  Under  the  law  that  these  waves  are  reduced  in  width  of 
vibration  in  proportion  as  hazard  is  segregated  into  smaller 
unexposed  values,  the  fire  insurance  company,  by  assuming  a 
limited  part  (known  as  its  line)  of  many  hazards,  reduces  the 
wave  of  fire  destruction  with  relation  to  its  own  liability.  It  is 
obvious  that  if  all  risk  units  could  be  so  distributed  as  to  reduce 
waves  of  destruction  within  maxima  and  minima  limits  so  close 
together  as  to  be  practically  identical,  the  element  of  risk  would 
be  eliminated,  and  fire  insurance  could  assume  each  property 
owner's  hazard  with  the  certainty  that  income  and  outgo  would 
be  practically  equal  year  after  year.  Were  this  possible,  mutual 
insurance  would  supersede  stock  insurance,  for  along  with  the 
elimination  of  uncertainty  from  the  industry,  profits  would  disap- 
pear, and  capital  be  no  longer  essential  to  the  business.  From 
the  facts  stated,  it  becomes  manifest  that  capital  is  necessitated 
by  waves  of  fire  destruction;  that  this  necessity  is  in  direct  pro- 
portion to  the  dimensions  of  these  waves,  and  that  the  risk  is 
lifted  off  the  shoulders  of  individuals  by  insurance  capital 
through  its  ability  to  reduce  loss  waves  with  relation  to  itself. 

It  is  a  legitimate  inference  that  the  risk  assumed  by  insurance 
capital  must  increase  in  direct  ratio  with  the  width  of  vibration 
found  in  the  wave^  of  destruction  which  create  the  risk,  and  that 
the  compensation  to  capital  (net  underwriting  profits)  should  be 
commensurate  with  the  width  of  wave  motion  found  in  specific 
property  classes,  for  this  width  of  vibration  creates  the  risk  which 
capital  is  paid  to  assume.  Capital  is  paid  to  assume  risk.  This 
risk  is  proportionate  to  width  of  wave  vibration,  hence  this  width 
truly  measures  the  extent  of  the  service  rendered.  Whether  or 
not  capital  secure  its  adequate  wage  for  this  service  is  deter- 
mined largely  by  competitive  conditions,  but  the  law  that  the 
extent  of  the  service  to  each  property  class  is  in  direct  ratio  with 
width  of  vibration  in  its  loss  wave  remains  constant. 

Aside  from  the  service  rendered  by  capital  itself  in  assuming 
risk  or  hazard,  the  matter  of  expense  must  be  reckoned  with; 
and  encysted  in  this  expense  is  found  another  kind  of  service, 


42  Fire-Rating  as  a  Science 

rendered  by  agents.  The  extent  of  this  service  is  determined, 
not  by  the  width  of  class  waves,  but  by  the  actual  labor  per- 
formed. Hence  there  are  two  distinct  kinds  of  service  rendered, 
one  by  capital  and  one  by  labor,  the  extent  of  each  being  meas- 
urable by  two  distinct  standards  of  comparison.  In  the  past  the 
compensation  exacted  by  capital  for  its  service  to  specific  classes 
has  not  been  in  proportion  to  width  of  vibration  found  in  the 
waves  of  fire  destruction  of  each  class,  but  in  most  cases  exactly 
the  reverse.  Property  classes  with  small  waves  have  been  made 
to  pay  capital  the  largest  wage ;  while  classes  with  the  largest 
waves  have  either  been  served  gratuitously,  or,  in  many  cases, 
actually  bribed  by  insurance  capital  for  the  privilege  of  assuming 
their  risk. 

On  the  other  hand,  the  personal  service  rendered  by  agents 
has  been  the  cause  of  a  twenty  years*  war  over  the  question 
whether  the  laborer  was  worthy  of  his  hire.  This  question  seems 
to  be  in  a  fair  way  of  settlement  upon  the  basis  of  service 
rendered,  and  when  settled  upon  some  uniform  scale  that  will  be 
satisfactory  to  all  interests,  it  will,  for  the  first  time  in  the  history 
of  fire  insurance,  be  possible  to  deal  with  expense  in  its  entirety 
as  an  unchanging  ratio. 

Fire  rates  create  the  underwriting  income  of  the  companies 
as  a  whole,  and  necessarily  include  all  items  of  outgo  with  an 
adequate  underwriting  profit  as  the  wage  of  capital  itself.  In 
the  present  stage  of  evolution  found  in  underwriting  ethics,  the 
fixing  of  this  wage  is  beyond  quantitative  control,  except  as 
determined  by  competition  and  expediency,  and  it  may  be  dis- 
missed from  further  consideration  as  being,  at  present,  a  per- 
turbing influence  outside  the  purview  of  science.  With  the 
element  of  capital's  own  wage  (commonly  known  as  underwriting 
profit)  eliminated,  we  have  remaining  the  factors  of  loss  and 
expense,  which  constitute  the  actual  cost  of  the  indemnity  sold 
by  fire  insurance.  If  we  assume  any  constant  ratio  as  a  fixed 
expense,  it  becomes  possible  to  superimpose  this  ratio  upon  the 
fluctuating  wave  of  fire  destruction,  and  obtain  a  wave  of  cost 
with  a  contour  identical  at  every  point  with  the  wave  of  loss,  but 
elevated  at  every  point  by  the  ratio  added  for  expense.  In  this 
way  the  problem  is  reduced  to  an  analysis  of  coexistent  cost 


Law  of  the  Wave  of  Fire  Destruction  43 

relations,  and  a  synthesis  of  these  relations  into  a  tariff  system 
to  be  used  as  a  standard  of  measurement.  As  before  shown, 
measurement  is  impossible  without  an  arbitrary  standard  of  com- 
parison, and  the  thing  to  be  measured  must  conform  to  natural 
laws.  It  has  been  shown  that  the  wave  of  fire  destruction  is  not 
lawless,  but  on  the  tontrary,  conforms  to  the  law  that  width  of 
vibration  diminishes  in  direct  ratio  with  the  segregation  of  hazard 
into  smaller  unexposed  values.  It  may  be  granted  that  this  is 
an  absurdly  simple  law,  but  no  more  simple  than  other  natural 
laws,  and  as  stated  by  Jevons,  no  less  likely  to  "reappear  in  the 
most  complicated  and  mysterious  processes  of  scientific  method." 
Summed  up,  we  have  a  thing  to  measure,  which  under  the  thesis 
of  science  cannot  be  outside  the  pale  of  law,  and  to  measure  this 
thing  we  must  have  an  agreed  standard  that  does  not  change. 


PART  II 

DETAIL 


The  Evolution  of  Procedure  in  Fire-Rating 

Fire-rating,  as  a  science,  must  consist  of  an  accurately  veri- 
fied body  of  knowledge  and  an  activity  based  upon  this  body  of 
organized  knowledge,  which  has  for  its  end  the  measurement 
of  fire  hazard  in  conformity  with  the  principles  established  by 
the  science  itself. 

"A  science  teaches  us  to  know,  an  art  to  do.  Science  gives  us  prin- 
ciples, while  an  art  gives  us  rules.  In  art,  truth  is  a  means  to  an  end.  In 
science,  it  is  an  end  itself.     Historically,  art  has  often  preceded  science."* 

The  activity  of  measuring  fire  hazard  based  upon  this  organ- 
ized body  of  knowledge  might  be  called  an  art,  and  the  real 
question  is,  whether  this  activity  can  be  intelligently  guided  by 
a  basic  science  consisting  of  an  organized  body  of  knowledge  of 
the  phenomena  of  fire  destruction. 

We  have  seen  from  the  preceding  chapters  that  all  reasoning 
begins  with  the  establishment  of  relations,  and  that  these  rela- 
tions are  divisible  into  coexistent  and  sequential.  In  fire-rating 
we  must  establish  not  only  internal  relations  in  each,  but  the 
external  relations  of  each  to  the  other. 

With  this  end  in  view,  it  is  proper  to  analyze  the  procedure 
of  fire  insurance  in  establishing  its  selling  price,  as  evolved  by 
experience  and  necessity. 

There  is  an  interesting  contrast  and  resemblance  between  the 
evolution  of  fire-rating  and  the  evolution  of  gunnery.  Gunnery 
has  for  its  end  the  concentration  of  destruction,  while  fire-rating 
has  for  its  end  the  dispersion  of  destruction.  Gunnery  seeks  to 
send  destruction  with  the  greatest  possible  certainty  to  a  given 
spot.  Fire-rating  seeks  to  apply  relief  for  destruction  by  fire 
with  the  greatest  possible  accuracy  through  the  equitable  distri- 
bution of  assessed  loss  over  areas  of  time  and  space.  Gunnery 
started  from  the  established  fact  that  gunpowder  is  explosive; 
fire-rating,  from  the  fact  that  fire  is  destructive.    From  its  estab- 

*  Sphere  of  Science,  Hoffman. 

47 


48  Fire-Rating  as  a  Science 

lished  fact,  gunnery  provisionally  assumed  that  gunpowder 
exploded  in  a  tube  open  at  one  end  would  eject  a  missile;  next, 
that  by  pointing  the  tube  in  a  given  direction  it  would  send  the 
missile  in  that  direction;  next,  that  the  projectile  would  go 
farther  with  a  larger  charge  of  powder  and  the  elevation  of  the 
open  end  of  the  tube ;  next,  that  it  would  go  farther  if  round 
than  if  of  irregular  shape,  and  still  farther  if  conical  rather  than 
spherical. 

All  these  assumptions  were  qualitative,  and  the  further  prog- 
ress of  gunnery  as  a  science  demanded  quantitative  prevision  in 
order  to  send  the  projectile  as  nearly  as  possible  to  any  given 
spot  within  the  widest  range.  It  was  found  that  by  rifling  the 
gun  to  impart  a  circular  motion  to  the  projectile  it  would  go 
straighter,  but  this  circular  motion  was  found  to  develop  a 
lateral  tendency,  known  as  windage.  The  possibility  of  quanti- 
tative reasoning  started  with  the  invention  of  graded  sights  to 
measure  the  exact  degree  of  elevation  and  deviation  in  the  gun 
necessary  to  correct  windage  and  gravitation.  Through  the 
investigation  of  explosives  and  initial  velocity,  the  gradual  evo- 
lution of  a  variety  of  collateral  apparatus  followed,  until  it  has 
become  possible  to  send  a  projectile  to  any  desired  point  within 
a  radius  of  fifteen  or  twenty  miles  with  marvelous  accuracy;  and 
out  of  the  original  fact  that  gunpowder  is  explosive  many 
sciences,  or  more  properly  arts,  have  been  evolved.  Among 
these  we  find  the  construction  of  guns,  projectiles,  range-finders, 
sighting  apparatus,  explosives,  fortifications,  and  armored  pro- 
tection. In  addition  to  these  allied  activities,  applied  mathe- 
matics has  been  pressed  into  service  in  the  investigation  of  force 
and  resistance,  and  in  determining  the  relations  between  initial 
velocity  and  the  parabola  of  two  directions,  caused  by  windage, 
gravitation,  etc. 

During  the  slow  evolution  of  gunnery  and  its  collateral 
sciences,  it  was  assumed  that  a  hollow  projectile,  filled  with 
explosive  material,  could  be  made  to  explode  either  within  a 
given  time  or  in  contact  with  its  target,  and  that  the  explosion 
of  the  projectile  would  create  greater  destruction  than  a  solid 
projectile. 

Quantitative  prevision  paused,  however,  with  this  secondary 


The  Evolution  of  Procedure  in  Fire- Rating         49 

explosion  of  the  shell,  and  it  remains  for  the  future  to  determine 
the  possibility  of  ascertaining  how  many  sub-projectiles  will  be 
created  by  this  explosion,  and  in  what  direction  and  how  far  each 
fragment  will  go. 

So,  in  the  problem  of  fire-rating,  starting  from  the  known 
fact  that  fire  is  destructive,  we  seek  to  disperse  the  disaster 
through  assessments  on  specific  property,  in  proportion  to  its 
specific  liability  to  destruction,  under  the  general  law  of  average. 

By  keeping  a  record  for  a  year  we  can  determine  at  the  end 
of  the  year  the  ratio  between  receipts  and  disbursements  neces- 
sary to  make  good  the  destruction,  and  through  a  comparison  of 
the  total  amount  insured  with  the  total  premiums  received  we  are 
able  to  determine  the  average  rate  for  a  given  period  on  all 
property.  By  similar  comparisons  we  are  able  to  determine  the 
ratios  of  loss  and  expense.  Experience  has  further  shown  that 
certain  species  of  property  have  so  many  points  of  resemblance 
that  they  can  be  grouped  in  classes,  and  that  the  record  of  any 
of  these  classes,  for  any  given  period,  will  show  similar  ratios 
for  each  class.  So  far  we  are  able  to  establish  exact  measure- 
ment, from  which  we  are  enabled  to  intelligently  determine  our 
selling  price  for  indemnity  as  a  whole,  or  for  any  class  of  which 
we  have  kept  a  separate  record.  With  equal  precision  we  can, 
by  classifying  the  different  grades  of  fire  department  protection, 
or  construction  of  buildings,  determine  the  average  for  each 
standard  of  protection  for  each  character  of  building;  or  by 
keeping  a  record  of  any  or  all  of  these  features  we  can  determine 
the  averages  for  one  or  all  in  any  given  state. 

So  far  our  reasoning  has  potentially  the  accuracy  of  mathe- 
matics. We  now  reach  a  secondary  degree  of  accuracy  in  the 
specific  features  of  each  risk,  as  found  in  its  methods  of  lighting, 
heating,  occupancy,  structural  features,  private  devices  for  pre- 
venting fires,  and  its  exposures  from  other  buildings.  It  is 
clearly  within  the  possibilities  of  statistical  science  to  determine 
the  relative  degrees  of  hazard  between  lighting  a  building  by 
candles,  coal  oil,  gas,  or  electricity,  or  heating  it  by  open  fire- 
places, stoves,  hot  air,  or  steam  furnaces,  and  it  would  be  equally 
possible  to  determine  the  same  relations  with  all  the  more  impor- 
tant features  of  structure,  occupancy,  and  exposure,  provided  it 


50  Fire-Rating  as  a  Science 

were  possible  to  locate  in  every  case  the  cause  of  the  fire^  but  it  would 
require  a  vast  and  expensive  system  of  statistics  based  upon  data 
impossible  to  obtain,  for  the  reason  that  the  origin  of  fires  is  very 
often  unknown.  This  difficulty  has  been  met  by  utilizing  a  system 
of  analysis  of  the  individual  risk,  through  which  we  estimate  by 
charges  and  credits  the  relative  hazard  of  its  parts,  as  far  as 
analyzable.  In  adopting  this  plan  of  avoiding  a  tremendous 
expansion  of  statistics  for  a  comparatively  unimportant  end,  fire 
insurance  has  followed  the  usages  of  the  industrial  world  and  all 
governments  in  determining  value  relations  by  estimate;  hence, 
as  an  expedient,  it  is  identical  with  the  expedient  adopted  from 
time  immemorial  by  governments  and  peoples  for  similar  con- 
ditions. In  thus  adopting  the  economic  law  of  common  sense 
instead  of  searching  for  obscure  and  innumerable  laws  of  causa- 
tion in  the  effort  to  obtain  more  exact  relations  among  unimpor- 
tant factors,  reasonable  equity  is  obtained  so  long  as  personal 
favoritism  is  abolished,  and  every  man  accorded  the  same  charge 
or  credit  for  the  same  item  of  hazard. 

We  now  reach  a  third  phase  of  fire-rating,  in  the  nameless, 
numberless,  and  often  remote  causes  of  fire  which  are  not  only 
unanalyzable,  but  often  undiscoverable. 

In  this  stage,  analysis  and  prevision  are  as  uncertain  as  in  the 
post-explosion  stage  of  gunnery,  in  which  it  is  impossible  to  fore- 
tell the  specific  consequences  which  will  result  from  the  bursting 
of  a  shell.  In  this  remote  region  which  lies  outside  the  border- 
land of  inductive  observation,  however,  fire  underwriting  experi- 
ence has  brought  forth  from  the  crucible  of  conference  and 
competition  some  nuggets  of  pure  metal,  by  establishing  fixed 
usages  which  appeal  to  common  intelligence.  Mercantile  occu- 
pancies have  been  analyzed,  classed,  graded,  and  valued;  the 
permanent  features  of  industrial  processes  sorted,  estimated,  and 
labeled  with  their  relative  hazard  value,  and  the  residuum  of 
irreducible  slag  left  in  the  crucible  has  been  estimated  as  a  whole 
for  each  class  of  property  under  the  name  of  "basis  rate."  This 
basis  rate,  arbitrarily  assumed  as  the  residuum  of  hazard,  after 
it  has  been  purged  of  all  measurable  factors,  is  the  nucleus  on 
which  each  rate  estimate  is  built,  and  when  so  built  we  have  a 
synthesis  of  artificial  relations  between  the  analyzed  and  unan- 


The  Evolution  of  Procedure  in  Fire-Rating  5 1 

alyzed  factors  of  hazard  as  a  sort  of'  working  hypothesis.  By  a 
singular  reversal  of  ordinary  reasoning  methods,  these  artificial 
relations  established  by  reasoning  purely  hypothetical  constitute 
the  basis  of  the  ratios  on  which  fire  insurance  must  establish  its 
sequential  relations. 

In  ordinary  reasoning,  the  individual  rate  should  come  last 
instead  of  first,  but  necessity  has  compelled  a  reverse  process  of 
reasoning — a  good  deal  like  it  would  be  in  gunnery  if  we  should 
begin  with  the  pieces  of  an  exploded  shell,  and  calculate  the 
trajectory  of  each  irregular  fragment  back  to  the  place  it  occu- 
pied in  the  shell  before  explosion,  then  figure  the  gravity,  wind- 
age, elevation,  initial  velocity,  and  all  that  sort  of  thing  necessary 
to  replace  the  shell  intact  in  the  gun  whence  it  started.  This 
perplexing  reversal  is,  however,  a  logical  necessity  imposed  upon 
fire  insurance  by  its  relations  with  policy  holders,  and  the  fact 
does  not  necessarily  render  the  solution  of  its  problem  less  accu- 
rate on  that  account.  It  is  this  blindfolded  orientation  that  creates 
most  of  the  prevailing  skepticism  as  to  the  possibility  of  scientific 
rating.  This  confusing  necessity  of  backing  into  the  shafts  be- 
fore we  start,  originates  from  the  following  sequence  of  usage : 

The  ratios  of  loss  and  expense  are  found  by  comparing  amounts 
disbursed  with  aggregate  premiums;  but  this  aggregate  is  com- 
posed of  a  large  number  of  premiums  from  individual  risks,  and 
a  condition  precedent  to  the  collection  of  these  premiums  is  that 
there  must  be  a  relation  established  between  each  individual 
hazard  and  its  premium  satisfactory  to  the  buyer  of  indemnity. 
This  makes  the  first  act  that  sets  the  wheels  in  motion  an  esti- 
mate of  the  individual  premium ;  for  it  is  the  aggregate  of  these 
individual  premiums  which  constitutes  the  standard  that  enables 
us  to  sight  back  and  determine  the  relative  accuracy  of  the 
original  assumptions,  and  the  determination  of  this  relative  accu- 
racy enables  us  to  tell  not  only  whether  these  assumptions  were 
too  high  or  too  low,  but  how  much  too  high  or  low — in  other 
words,  to  establish  the  quantitative  reasoning  through  which  we 
can  accurately  estimate  hazard  in  dollars  and  cents.  In  this 
reciprocal  process,  established  rates  must  be  made  through  an 
endless  cycle  of  reasoning,  in  which  it  is  as  immaterial  which 
comes  first  as  it  is  in  the  cycle  of  causation  between  the  chicken 


£2  Fire-Rating  as  a  Science 

which  lays  the  egg  and  the  egg  which  hatches  the  chicken.  The 
essential  point  is  that  a  series  of  provisional  assumptions  through 
an  unending  process  of  readjustment  tends  to  become  more  and 
more  exact,  provided  we  are  faithful  to  the  assumptions. 

An  analysis  of  the  procedure  of  fire-rating,  in  its  present  stage 
of  evolution,  plainly  shows  the  continuous  exercise  of  the  classi- 
fying faculty  common  to  all  intelligence.  It  shows  that  normal 
reasoning  processes  have  been  continuously  engaged  in  establish- 
ing relations,  and  it  shows,  further,  that  these  relations  are 
divisible  into  coexistent  and  sequential.  In  the  grouping  of  class 
hazards,  the  establishment  of  standards  of  fire  protection, 
charges,  credits,  and  basis  rates  as  found  in  our  class  schedules, 
and  in  the  final  synthesis  of  these  relations  found  in  our  local 
tariffs,  we  discover  a  system  of  coexistent  relations,  but  in  our 
attempt  to  modify  these  relations  to  meet  our  constantly  shifting 
experience  year  after  year,  we  have  entirely  ignored  the  essential 
difference  between  coexistent  and  sequential  relations,  and  the 
fact  that  one  cannot  possibly  be  changed  into  the  other. 

Up  to  this  point  of  confusion,  fire  insurance  has  progressed 
by  correct  methods,  literally  because  it  could  not  help  itself; 
because  these  methods  are  inherent  in  all  intelligence,  and  as 
impossible  to  avoid  as  the  physical  function  of  breathing. 

The  trouble  begins  with  the  mixing  of  coexistent  and  sequen- 
tial relations.  The  former,  which  by  their  nature  are  perma- 
nent, and  should  be  marshaled  as  an  unchanging  whole  in  their 
necessary  progress  through  sequential  relations,  have  been  con- 
tinuously shuffled  because  of  our  inability  to  differentiate  two 
kinds  of  relations  inherently  distinct,  the  one  a  group  of  rela- 
tions which  by  nature  is  fixed  and  unchangeable,  the  other  a  series 
of  relations  which  by  nature  must  always  be  in  process  of  change. 

In  its  present  status,  fire-rating  as  a  science  might  be  com- 
pared with  the  science  of  gunnery,  as  it  would  be  if  reasoning 
had  simply  amused  itself  with  wagering  on  the  probable  trajec- 
tories of  the  fragments  of  exploding  shells.  We  gather  up  the 
disjecta  membra  of  provisionally  assumed  charges  and  credits, 
and  patch  them  onto  a  provisionally  assumed  nucleus  known  as 
a  basis  rate,  and  then  call  this  thing  of  provisionally  assumed 
shreds  and  patches  an  individual  rate.     When  a  local  tariff  of 


The  Evolution  of  Procedure  in  Fire-Rating  ^^ 

these  assumptions  has  been  formulated,  it  is  turned  out  to  the 
mercy  of  the  elements.  Contention  within  and  without  is  allowed 
to  work  its  own  sweet  will  in  changing  artificial  relations  of  coex- 
istence into  relations  of  sequence,  and  the  structure  of  artificial 
relations  we  have  erected  with  so  much  travail  begins  to  disinte- 
grate almost  before  the  paint  is  dry.  This  local  tariff  of  indi- 
vidual rate  estimates,  constructed  with  more  or  less  regard  to  a 
basis  tariff  of  hypothetical  assumptions,  is,  up  to  date,  the  furthest 
reach  of  fire-rating  as  an  activity.  It  would  be  a  work  of  super- 
erogation to  point  out  the  lamentable  results  of  the  arrested 
development  which  has  checked  further  growth  at  the  primary 
stage  of  reasoning,  where  we  simply  recognize  coexistent  rela- 
tions in  hazard,  which  we  arbitrarily  alter,  apparently  without  the 
slightest  conception  that  in  so  doing  we  are  essaying  the  impos- 
sible task  of  changing  space  into  time.  Viewed  as  coexistent 
relations  only,  there  is  no  lack  of  inconsistency  in  our  rates,  but 
by  constant  tinkering  with  these  relations  in  the  attempt  to  make 
them  sequential  we  violate  a  fundamental  law  of  all  science.  We 
construct  a  basis  schedule  of  each  state,  but  cannot  show  that  it 
bears  any  logical  relation  to  the  schedules  of  other  states.  We 
say  that  each  individual  rate  is  the  sum  of  a  basis  rate  combined 
with  certain  charges  and  credits,  but  cannot  show  whether  this 
basis  rate  is  relatively  correct  when  compared  with  others,  nor 
can  we  show  that  the  charges  and  credits  which  permeate  many 
classes  are  consistently  imposed  upon  each  class. 

This  naive  disregard  of  relations  crops  out  not  only  in  the 
comparison  of  every  existing  basis  tariff  with  other  tariffs,  but  in 
the  comparison  of  parts  of  the  same  tariff  with  other  parts;  select- 
ing for  example  the  following: 

Illinois  State  Board  Minimum  Tariff 1894 

Minnesota  and  Dakota 1895 

Southeastern  Tariff  Association 1895 

Indiana  Mercantile  Schedule 1893 

Missouri,  Kansas  and  Nebraska  Minimum  Tariff 1886 

Missouri  Minimum  Tariff 1894 

Illinois  Mercantile  Schedule 1895 

Western  Mutual  Underwriters'  Association  Minimum  Tariff --1882 

New  England  Insurance  Exchange  Schedule 1894 

Universal  Mercantile  Schedule 1896 


54  Fire-Rating  as  a  Science 

In  the  following  table*  the  upper  figures  show  the  number  of 
times  the  same  charge  appears  in  all  the  above  tariffs,  and  the 
lower  figures  show  the  different  charges  made  for  the  same  thing: 

Awnings,  wood,  on  one-story  building,  |,  fV,  gV 

Boiler  in  frame  boiler-house,  H,  ^\,  ^a,  ^,  ^i^]  J^,  f  |,  /.,  ^y^,  ^^. 

Shingle  roof  boiler-house,  y^^,  j%,  |g,  ^\j. 

Shingle  roof  on  brick  boiler-house,  j%,  ^%,  ||,  ^,  ^. 

Cornice,  wood,  i,  |,  j*^,  gS^. 

No  casks  or  pails  of  water,  |,  f  ~g,  J§,  ||,  i§. 

Dipping  in  building,  ||,  |f,  ^-i^. 

Heating  by  furnace,  i  i,  j*^,  if,  /j,  ^^,  ^3^. 

Heating  by  wood  stoves,  ^,  ^%,  ^%,  ||,  i^,  ^\„  ^%. 

Heating  by  coal  or  oil  stoves,  |,  f  g,  if,  ^%  ||,  ^^,  ^V 

Lighting  by  other  than  by  gas  or  electricity,  |,  f^,  /^,  ||. 

Lighting  by  kerosene,  standard  metal  lamps,  I,  y^,  -^^. 

Lighting  by  kerosene,  glass  lamps,  y^^,  j^g,  j^. 

Lighting  by  kerosene,  lamps  filled  by  daylight  only,  y^^,  3*^,  i^,  ^,  ^,  ^. 

Ladders,  stationary  (none),  i,  ^,  y\,  ^0,  ^V- 

Planer,  each  machine,  g^^,  i^,  ^,  y\,  rfr). 

Planer,  without  blowers  or  conveyors,  ^,  ^j^,  yf^y,  jf^. 

Picker  in  mill,  y^,  ^\,  s\,  f?,  rou.  rixr- 

Roof,  shingle,  f,  H,  If,  H.  U.  /^.  tU- 

Spittoons,  sawdust,  i,  yV,  sS- 

Shavings  vault,  wood,  ^,  ^,  y^,  y|^. 

Shavings  vault  (not  cut  off),  \^,  j\,  ^^,  ^,  ^. 

Shavings  vault,  standard  (cut  off),  y'^,  ^s>  ^' 

Shavings  vault,  standard  (not  cut  off),  ^,  ^,  ^%. 

Metal  stack  through  metal  roof,  |,  yV,  i^,  ^q. 

Metal  stack  through  shingle  roof,  with  collar,  yV,  |f. 

Metal  stack  through  roof  or  floor  (no  jacket),  5V,  ^^,  J4.  ts- 

Metal  stack  through  shingle  roof,  y%,  ^^,  ||. 

Varnishing,  y^-,  ^\,  ||,  ^V.  A»  ih- 

Watchman  and  clock  (none),  |,  ^^,  ^%,  |f,  |g,  ^,  ^\,  ^. 

Watchman  (no  clock),  |,  fj,  Jf,  iV.  P^- 

Woodwork,  not  whitewashed  or  painted,  ^,  |f ,  j^^,  gV 

One  might  go  on  indefinitely  pointing  out  incongruities  of  this 
kind  in  our  coexistent  relations,  and  it  needs  no  argument  to 
show  that  every  attempt  to  cobble  these  into  relations  of  sequence 
makes  confusion  worse  confounded. 

It  would  be  a  truism  to  say  that  in  the  face  of  inconsistencies 
so  glaring,  explanation  or  defense  is  impossible.    The  public  con- 

*The  author  is  indebted  to  the  late  L.  H.  Ticknor,  Esq.,  of  Peoria,  111.,  for  the  above  list. 


The  Evolution  of  Procedure  in  Fire-Rating  55 

tention  that  rates  are  made  "by  guess  and  begad"  is  susceptible 
of  proof  from  the  documentary  evidence  contained  in  our  own 
tariffs.  It  matters  not  that  under  the  leveling  force  of  self-inter- 
est among  brokers,  agents,  companies,  and  the  public,  receipts 
and  disbursements  come  out  almost  exactly  even,  if  taken  for 
decade  periods;  in  other  words,  that  indemnity  as  a  whole  is 
practically  sold  at  average  cost.  Our  failure  to  make  a  profit 
does  not  concern  the  public,  but  our  failure  to  maintain  reason- 
ably true  rate  relations  offends  the  sense  of  relation  which  is 
instinctively  the  basis  of  every  reasoning  process.  Even  low 
rates  that  are  inequitable  are  an  offense  to  common  intelligence. 


The  Formula  of  the  Rating  Function 

The  undisputed  facts  cited  in  the  previous  chapter  are  the 
results  of  an  unreasoning  determination  to  make  a  system  of 
artificial  coexistent  relations  perform  the  entire  function  of  meas- 
uring fire  destruction,  while  we  ignore  the  natural  sequential 
relations  found  in  loss  waves,  as  well  as  in  every  other  mode  of 
motion. 

In  the  past,  expediency  alone  has  fixed  the  price  of  fire  indem- 
nity. The  seller  has  fought  for  high  prices,  and  the  buyer  for 
low  prices,  and  between  these  two  contending  influences  rates 
have  been  kept  in  an  irregular  and  spasmodic  motion  similar  to 
the  atmospheric  wave  known  in  music  as  cacophony.  Fire 
destruction,  too,  like  every  other  motion  resulting  from  contend- 
ing influences,  has  created  its  own  wave.  We  have  thus  two 
irregular  waves — the  loss  wave  occasioned  by  the  countless  ele- 
ments of  fire  hazard,  and  a  sort  of  "rough  and  tumble"  zigzag 
(which  might  be  dignified  by  the  name  of  rate  wave)  caused  by 
the  foot-ball  tactics  of  buyers  and  sellers  of  indemnity,  and 
further  complicated  by  the  arbitrary  decisions  of  an  umpire, 
known  as  the  local  agent,  who  has  a  stake  up  on  the  game. 

While  we  know  that  rates  must  be  constantly  changed,  we 
construct  our  tariffs,  in  theory  at  least,  on  the  assumption  that 
we  can  maintain  them  permanently  at  an  unvarying  level.  When 
contending  influences  force  this  level  into  a  r^te  wave,  it  is 
invariably  a  cacophonous  wave,  not  in  harmonious  relations  with 
the  wave  of  fire  destruction,  because  it  is  largely  the  product  of 
contending  personal  motives  beyond  quantitative  analysis.  In 
making  rate  changes,  in  obedience  to  the  law  of  expediency,  we 
not  only  observe  no  system,  but  cannot  observe  system.  At  one 
time  we  make  a  so-called  percentage  change,  at  another  a  flat 
rate,  at  another  a  competitive  rate,  at  another  a  suspended  rate, 
and  after  a  series  of  these  changes  has  completely  obliterated 
established  relations  we  are  again  compelled  to  construct  new 

56 


The  Formula  of  the  Rating  Function  57 

basis  tariffs,  and  re-create  hundreds  or  thousands  of  local  tariffs 
of  coexistent  relations,  which,  before  we  can  place  them  in  the 
hands  of  our  agents,  are  fly-blown  with  the  germs  of  dissolution, 
because  they  furnish  our  only  available  material  for  establishing 
sequential  relations. 

Under  such  influences,  a  new  departure  in  rating  methods  is 
a  crying  need,  and  the  first  necessity  is  the  fundamental  rule  of 
action  essential  to  every  scientific  activity.  This  rule  must  be 
an  accurate  definition  of  the  function  of  fire-rating  in  its  broadest 
sense  as  an  activity.  That  fire  insurance  meets  a  public  need, 
aside  from  being  a  mere  means  of  earning  salaries  and  dividends, 
must  be  admitted,  else  it  could  not  exist.  We  have  been  accus- 
tomed to  define  this  utility  as  the  distribution  of  fire  destruction 
from  the  individual  to  the  community,  but  in  this  distribution  it 
is  necessary  to  consider  something  more  than  the  individual,  for 
each  property  group,  community,  state,  and  year  may  justly 
claim  relief  from  an  excessive  burden  of  fire  destruction  with  the 
same  logic  as  the  individual;  and  even  the  nation  at  large  may 
stagger  under  the  burden  of  a  single  year's  losses,  and  justly 
claim  that  these  losses  shall  be  spread  out  through  a  period  of 
years.  This  makes  it  an  essential  part  of  the  duties  of  fire  insur- 
ance not  only  to  distribute,  but  to  redistribute  and  re-redistribute, 
in  order  to  avoid  oppressive  taxation.  While  the  above  definition 
may  answer  as  a  broad  statement  of  the  ethical  obligations  of 
fire  insurance  to  the  community,  it  is  not  a  definition  applicable 
to  the  needs  of  a  physical  science.  If  the  measurement  of  fire 
hazard  can  be  done  scientifically  we  must  admit  that  the  activity 
of  fire-rating  legitimately  belongs  to  the  family  of  physical 
sciences,  and  all  physical  sciences  deal  with  the  properties  of 
waves.  What  we  need  is  a  generalization  defining  the  function 
of  fire-rating  as  a  physical  science. 

An  unbiased  consideration  of  the  phenomena  of  fire  rates 
during  recent  years  ought  to  convince  any  sane  man  that  in  our 
refusal  to  permit  rate  waves  to  vibrate  in  harmonious  sequence 
to  cost  waves  we  have  been  floundering  about  in  the  vain  attempt 
to  adapt  an  inflexible  system  to  flexible  conditions.  Like  the 
African  who  ties  up  his  hair  with  cotton  twine  to  take  the 
*'kinks"out  of  it,  we  have  long  struggled  against  nature  in  the 


58  Fire-Rating  as  a  Science 

attempt  to  take  the  kinks  out  of  a  thing  which  stubbornly  refuses 
to  remain  straight. 

Our  persistent  efforts  to  flatten  loss  waves  into  unvarying 
rate  lines  have  been  a  long  and  irritating  struggle  against  the 
inexorable  physical  law  of  rhythm,  and  our  indisposition  or 
inability  to  recognize  this  law  has  caused  endless  trouble  and 
misunderstandings  among  ourselves  and  with  the  public. 

If  it  were  possible  to  conceive  of  a  sea-going  vessel  so  con- 
structed as  to  be  unresponsive  to  the  wave  motion  of  the  ocean, 
and  started  on  a  voyage  from  New  York  to  Liverpool,  we  should 
find  it  in  heavy  weather  buried  half  the  time  under  mountains  of 
sea-water,  and  the  other  half  paddling  through  space.  Could  we 
trace  the  ordinary  motion  of  sea-going  vessels,  we  should  find  a 
profile  view  of  their  line  of  progress  to  be  invariably  a  modified 
form  of  the  surface  wave.  It  is  as  illogical  to  ignore  the  neces- 
sity of  rhythm  in  fire  rates  as  it  would  be  in  navigation  to  ignore 
the  law  of  wave  motion. 

The  ocean  surface  when  relieved  from  atmospheric  disturb- 
ances settles  down  to  a  dead  level.  This  level  is  the  exact  mean 
between  the  sum  of  the  wave  protuberances  and  hollows,  so  that 
in  a  dead  calm  the  track  of  the  vessel  and  water  surface  would 
be  at  all  times  exactly  parallel.  In  the  same  manner,  between 
any  two  given  points  of  time  there  is  an  average  cost  of  fire 
underwriting  to  be  found,  which  is  the  true  mean  between  the 
crest  and  trough  of  the  annual  cost  wave  of  each  class. 

It  is  this  average  cost  which  is  the  real  straight-line,  the 
unchanging  sea-level,  of  every  property  class,  and  it  is  this  which 
we  should  seek  to  establish  as  a  fixed  basis  for  our  coexistent 
relations,  and  our  rates  should  be  permitted  to  fluctuate  above 
and  below  this  mean  line  in  intelligently  modified  waves,  as 
determined  by  the  greater  wave  found  in  the  annual  cost  ratio  of 
each  class. 

The  ascertainment  of  the  true  level  of  average  cost  of  each 
class,  and  the  continuous  control  of  the  rate  wave  by  reckoning 
from  this  as  a  "base  line,"  constitutes  the  real  problem  of  estab- 
lishing sequential  relations,  and  the  determination  of  this  base 
line  is  as  purely  a  question  of  statistics,  and  ought  to  be  as  free 
from  contending  personal  influences,  as  the  establishment  of  a 


The  Formula  of  the  Rating  Function  59 

principal  meridian  in  land-surveying,  or  the  determination  of 
a  ship's  position  at  sea. 

It  is  the  object  of  this  inquiry  to  learn  how  this  average  cost 
for  each  class  may  be  determined,  and  how  from  this  as  a  base, 
rate  waves  may  be  so  regulated  as  to  be  in  harmony  with  their  loss 
wave,  and  at  the  same  time  be  modified  into  waves  of  endurable 
proportions. 

It  is  a  characteristic  of  all  waves  that  they  become  intolerable 
when  the  amplitude  of  vibration  exceeds  certain  limits.  Ocean 
waves  beyond  a  certain  magnitude  become  destructive  to  sea- 
going craft.  A  deafening  noise,  a  blinding  light,  a  withering 
heat,  an  intolerable  electrical  discharge,  are  one  and  all  results 
of  width  of  vibration  in  the  media  through  which  they  are  prop- 
agated. 

The  well-known  generalization,  that  the  intensity  of  all  wave 
motion  increases  in  proportion  to  the  square  of  the  amplitude  of 
vibration,  might  be  said  to  apply  not  only  to  matter  but  to  mind 
and  its  concerns,  for  violent  change  is  destructive  to  all  human  in- 
terests. Wide  fluctuations  in  values  create  commercial  panics, 
and  in  lesser  degree  wide  fluctuations  in  fire  rates  are  intolerable 
to  the  community. 

This  universal  characteristic  of  wave  motion  leads  us  to  the 
unavoidable  inference  that  //  is  the  true  function  of  fire-rating  in 
its  broadest  aspect  to  transmute  annual  cost  waves  into  rate  waves 
modified  into  proportions  that  will  be  endurable  to  property  interests. 
This  is  the  fundamental  rule  from  which  fire-rating  as  a  physical 
science  must  start. 

Can  this  be  done  consistently  with  the  description  of  scientific 
reasoning  set  forth  in  the  opening  chapters?  In  order  to  answer 
this  question,  it  will  first  be  necessary  to  take  up  the  individual 
rate  as  a  synthesis  of  coexistent  relations. 


The  Individual  Rate 

The  individual  rate  as  a  cause  and  effect,  as  the  a  and  the  x 
of  the  rating  equation,  is  a  standing  paradox. 

In  the  beginning  it  seems  that  relative  difference  of  hazard 
was  recognized  to  the  extent  that  it  was  assumed  that  a  frame 
building  was  twice  as  hazardous  as  one  of  brick  or  stone,  hence 
it  should  pay  twice  the  rate,  but  it  was  necessary  to  postulate  a 
rate  for  each  frame  and  brick,  bearing  the  relation  of  two  to  one. 
On  the  basis  of  these  postulated  class  rates,  risks  were  insured, 
and  a  fund  of  premiums  collected,  from  which  losses  and  expenses 
were  paid,  and  at  the  end  of  a  stated  period  it  was  possible,  by 
keeping  a  separate  account  with  bricks  and  frames,  to  determine 
whether  the  individual  rates  so  assumed  had  been  adequate  or 
inadequate.  In  this  way  the  individual  rate  created  the  fund, 
and  the  ratio  of  losses  paid  from  this  fund  was  the  standard  from 
which  the  individual  rate  was  adjusted,  on  the  basis  of  experi- 
ence. But  experience  developed  numerous  other  differences  in 
hazard,  internal  and  external;  and  at  the  present  time  every 
prominent  company  keeps  a  debit  and  credit  account  with  classes, 
and  can  tell  its  ratio  of  loss  on  each  class  with  which  it  keeps  an 
account.  In  every  class,  however,  there  remained  other  and 
more  elusive  distinctions,  which  in  time  caused  the  companies  to 
resort  to  class  basis  schedules  as  a  means  of  determining  the 
relative  hazard  of  the  individual  risks  in  each  class.  Whether 
the  specific  rates  established  through  these  basis  schedules  bear 
accurate  relations  to  each  other  there  is  not,  and  probably  never 
will  be,  any  way  of  exactly  determining.  Meanwhile,  the  rela- 
tive rates  thus  established  constitute  the  working  hypothesis, 
from  which  we  must  reason  to  a  reasonable  certainty  in  other 
and  more  important  problems  of  fire-rating.  The  basis  schedule 
of  each  class,  however,  is  in  effect  an  analysis  consisting  of 
estimates  of  the  specific  factors,  so  far  as  analyzable,  which 
create    the    individual    rate;    hence    the   individual   rate   itself 

60 


The  Individual  Rate  6i 

has  ceased  to  be  the  ultimate  unit  in  the  rate-making  compu- 
tation. 

It  is  the  charges  and  credits  in  basis  schedules  which  consti- 
tute the  real  units,  and  it  is  with  these  we  must  reckon,  as  the 
individual  rate  is  simply  a  result  which  may  be  stated  as  the  sum 
of  its  charges  less  the  sum  of  its  credits.  These  charges  and 
credits  for  the  appraised  features  of  risks  may  permeate  an  entire 
group,  or  even  several  groups,  of  risks.  They  are,  as  a  rule, 
individually  insignificant  in  amount,  and  in  many  classes  the  indi- 
vidual rate  may  be  created  by  the  addition  of  scores  of  these 
units  to  the  class  basis  rate,  which  we  must  regard  as  a  residuum 
of  hazard  appraised  as  a  whole,  because  it  resists  further  analysis. 
Hence  the  real  question  is  to  determine  the  relative  equity  of 
each  of  these  factors  which  cause  the  effect  known  as  the  indi- 
vidual rate. 

Charges  and  credits  are  necessarily  provisional  assumptions. 
The  most  we  can  claim  for  them  is  that  they  are  based  upon 
united  judgment  and  experience,  through  which  alone  approxi- 
mate truth  can  be  estimated.  While  even  this  claim  will  admit 
of  debate  (for  they  have  always  been  the  source  of  much  contro- 
versy), there  is  no  disputing  the  fact  that  these  specific  charges 
and  credits  have  in  them  the  element  of  abstract  fairness.  Apply- 
ing to  features  common,  perhaps,  to  all  the  risks  of  a  class,  or  to 
a  large  portion  of  the  risks  of  many  classes,  they  are  free  from 
the  possibilities  of  personal  favoritism.  It  is  proper  to  assume 
that  as  many  of  these  elementary  factors  will  be  too  low  as  too 
high,  and  when  a  risk  is  unduly  taxed  in  one  charge  it  is  reason- 
ably sure  to  be  insufficiently  taxed  in  another.  If  a  charge  is  too 
high  to  be  ratified  by  the  average  judgment,  competition  begins 
at  once  to  seek  risks  having  this  feature,  and  the  charge  is  forced 
down  to  a  point  where  competition  ceases  to  make  special  efforts 
for  the  class.  Under  these  leveling  influences,  it  is  safe  to 
assume  that  each  charge  is  automatically  regulated  within  limits 
not  far  from  the  true  mean. 

Under  the  law  of  averages,  the  range  of  deviation  from  exact 
adequacy  in  each  charge  (which  might  possibly  be  determined  by 
elaborate  statistics)  is  so  reduced  that  probably  not  one  risk  in 
a  hundred  is  mulcted  in  an  amount  greater  than  its  rate  would 


62  Fire-Rating  as  a  Science 

be  increased  by  the  additional  expense  necessary  to  maintain 
such  statistics. 

Finally,  there  are  many  factors  in  fire  hazard  which  can  be 
closely  estimated  by  analogy,  yet  there  is  no  way  to  tell  whether 
these  factors  originate  a  fire,  or  what  measure  of  influence  they 
exert  in  increasing  or  decreasing  the  loss.  For  this  reason  their 
charges  are  not  amenable  to  statistical  investigation,  and  they 
must  remain  purely  arbitrary  hypotheses.  We  only  know  that 
under  the  law  of  probabilities  plus  quantities  may  be  considered 
to  offset  minus  quantities,  thus  producing  an  equipoise  which 
tends  toward  a  closer  approximation  to  true  relations  in  the  indi- 
vidual rate  they  create  as  compared  with  other  individual  rates. 
It  is  the  true  relation  of  these  individual  rates,  one  to  the  other, 
with  which  we  have  to  do,  rather  than  with  their  adequacy  or 
inadequacy.  The  cost  ratio  generated  by  the  coexistent  relations 
synthesized  from  basis  tariffs  into  individual  rates  will  eventu- 
ally prove  the  reasonable  accuracy  of  these  rates  when  we  once 
begin  to  recognize  the  vital  fact  that  they  are  coexistent  relations 
which  we  destroy  the  instant  we  attempt  to  change  them  into 
sequential  relations. 


Basis  Tariffs 

It  has  been  shown  that  the  individual  rate  as  it  appears  in 
regular  tariffs  is  not  the  ultimate  unit  in  the  rating  problem,  but 
a  compound  result  of  charges  and  credits  for  specific  features  of 
hazard,  arbitrarily  analyzed  and  appraised,  added  to  a  basis  rate 
which  itself  is  a  lump  charge  for  the  nucleus  of  hazard  that 
resists  analysis;  hence  the  individual  rate  is  the  result  of  a  num- 
ber of  provisional  assumptions,  except  when  assumed  bodily  as 
a  "flat  rate,"  in  which  case,  instead  of  appraising  the  parts  we 
simply  guess  at  the  whole. 

Every  class  basis  schedule  is  an  inventory  or  series  of  arbitrary 
valuations  of  the  factors  of  hazard  found  in  individual  risks  of 
a  given  class,  an  inventory  more  or  less  minute  and  more  or  less 
logical,  but  as  an  inventory  necessarily  more  accurate  when 
thrown  in  the  scales  of  the  individual  rate  than  any  guess  as  to 
the  entire  rate  in  one  sum.  In  fire-rating  we  thus  obtain  an  indi- 
vidual rate — the  sum  of  or  the  difference  in  a  series  of  assump- 
tions known  as  charges,  credits,  and  basis  rate. 

In  our  state  basis  tariffs  we  have  utilized  the  principle  of 
classified  standards  by  establishing  grades  of  fire  department 
protection  and  of  hazards  in  personal  property,  as  well  as  by 
assuming  basis  rates,  charges,  and  credits  for  every  important 
property  class.  Some  of  these  charges  and  credits  apply  to 
many  classes,  though  we  have  not  made  any  attempt  to  correlate 
or  co-ordinate  these  elementary  factors  in  order  to  secure  logical 
relations  among  them  as  they  appear  in  different  classes  or  states. 

Again,  in  adopting  basis  rates  to  represent  the  residuum  of 
unanalyzable  hazard  in  each  class,  we  appear  to  have  proceeded 
on  the  theory  that  this  nucleus  should  be  proportionate  to  the 
relative  hazard  of  its  class,  and  in  some  instances  proportionate 
to  the  relative  loss  ratio  of  states,  though  we  seem  to  have  done 
this  without  attempting  to  correlate  these  relations.  Neither  do 
we  appear  to  have  made  more  than  a  crude  attempt  to  observe  con- 

63 


64  Fire-Rating  as  a  Science 

sistent  relations  with  regard  to  grades  of  fire  department  protec- 
tion. That  these  relations  have  been  observed,  however  vaguely, 
indicates  a  correct,  if  indefinite,  drift  in  our  reasoning -processes. 

In  the  relations  between  the  charges  for  preferred,  non-pre- 
ferred, and  hazardous  stocks,  as  found  in  different  tariffs,  as  well 
as  between  the  rates  for  occupancy  as  compared  with  buildings, 
we  find  a  similar  vague  conception  of  the  fact  that  some  sort  of 
correlation  is  desirable. 

Summed  up,  our  completed  instrumentality  for  establishing 
rates  shows  a  well-defined  analysis  and  classification  of  parts, 
supplemented  by  a  feeble  attempt  to  establish  true  coexistent 
relations  among  these  parts,  with  an  unending  and  unavailing 
series  of  efforts  to  make  these  coexistent  relations  do  violence 
to  their  nature  by  serving  as  sequential  relations.  The  building 
up  of  each  rate  from  a  series  of  estimates  of  the  integral  parts  of 
hazard  is  as  logical  as  the  reasoning  of  the  builder  who  estimates 
the  quantity  of  lumber,  brick,  stone,  nails,  paint,  plaster,  and 
labor  he  will  need  in  a  building,  instead  of  guessing  at  the  cost 
of  the  building  as  a  whole.  The  division  of  towns  according  to 
their  grade  of  fire  protection,  and  of  risks  into  classes,  is  in 
harmony  with  the  fundamental  law  which  makes  the  classifying 
function  and  the  establishment  of  standards  of  comparison  inher- 
ent in  every  reasoning  process. 

The  establishment  of  a  ratio  between  the  basis  rate  and  the 
relative  hazard  of  classes  is  also  logical,  for  it  is  but  a  natural 
inference  that  the  larger  the  total  hazard  of  a  class  the  larger 
will  be  the  residuum  that  resists  analysis.  The  establishment  of 
relations  among  basis  rates  and  charges  in  the  several  states  is  a 
necessity  forced  upon  us  by  state  sovereignty,  as  well  as  by  the 
permanent  differences  found  in  climatic  and  social  conditions. 

In  fine,  it  may  be  stated  that  basis  tariffs,  with  all  their  imper- 
fections, are  as  well  adapted  to  their  purpose  of  establishing 
coexistent  relations,  and  in  all  respects  as  logical,  as  a  hoe,  hand- 
saw, jackknife,  or  any  of  the  innumerable  utensils  evolved  by 
human  necessity.  While  it  may  be  possible  to  improve  the  con- 
struction of  any  of  these  utensils,  it  would  be  difficult  indeed  to 
utilize  a  new  mechanical  principle  in  their  construction  which 
would  qualify  them  to  render  better  service.    For  similar  reasons, 


Basis  Tariffs  65 

it  is  equally  hopeless  to  expect  improvement  through  any  radical 
departure  from  the  established  principles  embodied  in  our  present 
class  basis  tariffs  regarded  as  a  system  of  coexistent  relations, 
because,  like  the  hoe  and  the  jackknife,  they  are  the  results  of  a 
natural  evolution  from  human  necessity. 

The  basic  defect  in  fire-rating  is  found  in  our  failure  to  recog- 
nize the  fact  that  in  the  whole  work  of  measuring  fire  destruction 
and  establishing  rates  we  are  under  the  law  of  relativity  of  knowl- 
edge dealing  with  a  series  of  relations ;  that  these  relations  are  of 
two  kinds,  coexistent  and  sequential;  that  our  charges,  credits, 
basis  rates,  basis  tariffs,  and  local  tariffs  as  a  system  are  an 
analysis  of  coexistent  relations,  and  that  we  cannot  mix  these 
relations  with  the  sequential  relations  found  in  the  movement  of 
annual  waves  of  fire  destruction  without  destroying  all  relations. 
It  is  not  new  principles  we  need  in  fire-rating  so  much  as  a  clari- 
fied understanding  of  principles  which  are  half  recognized,  and 
are  constantly  appealing  to  us  for  entire  recognition. 

An  interesting  experiment  in  the  wholesale  destruction  of 
fundamental  principles  and  established  relations  is  found  in  the 
so-called  Universal  Schedule.  As  strenuous  efforts  have  been 
made  during  recent  years  to  secure  the  adoption  of  this  schedule 
as  the  sole  rating  basis  of  the  country,  it  cannot  well  be  ignored 
in  our  discussion  of  fire-rating  as  a  science,  inasmuch  as  we  are 
led  on  to  the  conclusion  that  a  national  basis  schedule  is  a 
necessary  preliminary  to  scientific  rating. 

In  the  explanation  which  accompanies  the  Universal  Schedule, 
it  is  stated  that  "the  committee  early  in  its  deliberations  reached 
the  conclusion  that  it  should  be  formulated  upon  the  following 
lines,  and  that  it  should  recognize — " 

1.  A  standard  of  environment — the  city, 

(This  wipes  out  the  classification  of  fire  departments,  and  precludes  the 
reasoning  faculties  from  establishing  relations  among  standards  of  munici- 
pal fire  protection.) 

2.  A  standard  of  construction — the  building, 

(This  banishes  the  classification  of  buildings,  and  makes  it  impossible 
to  establish  relations  among  standards  of  construction.) 

3.  An  addition  for  the  ignitibility  and  combustible  features  of  occupancy, 
(This  dictum  is  carried  out  by  substituting  for  existing  classification  of 

occupancies  a  list  containing  two  or  three  thousand  different  mercantile  or 


66  Fire-Rating  as  a  Science 

industrial  occupancies,  each  tagged  with  a  selling  price.  This  prevents  the 
exercise  of  the  reasoning  faculties  in  establishing  relations  among  occu- 
pancies.) 

The  schedule  further  states  that  it  is  obviously  expedient  that 
rates  throughout  the  United  States  should  be  made  upon  one  and 
the  same  basis.  By  thus  abolishing  the  autonomy  of  states  which 
authoritatively  insist  upon  recognition,  state  basis  tariffs  are 
consigned  to  the  waste-basket  along  with  all  possibility  of  exer- 
cising the  reasoning  faculties  in  establishing  relations  among 
states. 

The  basis  rate,  which,  as  has  been  explained,  is  the  residuum 
of  unanalyzed  hazard,  is  referred  to  in  the  following  language: 

"  The  basis  rate  or  starting-point  for  rating  a  standard  building  in  a 
standard  city  has  been  fixed  at  twenty-five  cents  (25c.)  after  careful  con- 
sideration of  the  experience  tables  of  the  companies.  It  surely  was  not  a 
difficult  task  to  fix  this  rate  for  the  simplest  form  of  risks  under  the  best 
conditions  as  a  starting-point." 

As  a  celebrated  polemist  once  said,  "Refrain  from  rendering 
your  terms  into  ideas  and  you  may  reach  any  conclusion  what- 
ever."  To  define  the  residuum  of  unanalyzed  hazard  or  basis 
rate  as  *'a  starting-point"  is  to  render  a  term  into  an  idea  which 
might  answer  as  well  for  a  horse-race  as  for  the  work  of  estab- 
lishing a  preliminary  assumption  in  the  ambitious  task  of 
constructing  a  universal  schedule;  but  be  this  as  it  may,  the 
definition  and  assumption  of  twenty-five  cents  as  a  cosmic  basis 
rate  dis-establishes  classification  and  relativity  among  basis  rates. 

As  has  been  reiterated,  *'all  knowing  is  classifying,"  and  "all 
reasoning  is  the  establishment  of  relations";  hence,  in  the  light 
of  the  generalizations  quoted,  it  may  be  truthfully  said  that  the 
Universal  Schedule  makes  a  clean  sweep  of  the  twin  functions  of 
intelligence — classification  and  reasoning. 

When  God  sorted  out  chaos  into  an  orderly  creation,  we  are 
told  that  he  divided  the  light  from  the  darkness  and  called  them 
day  and  night,  and  divided  the  water  under  the  firmament  from 
the  water  above  the  firmament  and  called  them  heaven  and  earth, 
and  commanded  the  dry  land  to  appear;  and  gathered  together 
the  waters  and  called  them  seas,  and  established  lights  in  the 
heavens  to  divide  day  from  night,  and  be  signs  for  seasons,  days, 


Basis  Tariffs  67 

and  years ;  and  caused  the  waters  and  the  earth  and  air  to  bring 
forth  abundantly — fish,  fowl,  cattle,  and  creeping  things — every 
living  creature  after  its  kind.  This  sublime  example  of  classifi- 
cation and  relationing  set  by  the  Maker  of  the  universe  seems  to 
have  been  wasted  upon  the  maker  of  the  Universal  Schedule. 

This  tariff  (constructed  upon  the  assumption  that  it  estab- 
lishes a  science  of  fire-rating)  leaves  no  room  for  the  exercise  of 
further  judgment  by  substituting  the  judgment  of  its  maker  for 
every  microscopic  detail  of  the  building;  but  after  this  fine-tooth- 
comb  analysis  of  the  building  itself,  no  attempt  whatever  is  made 
to  analyze  or  classify  or  establish  relations  among  the  hazards  of 
occupancy.  A  specific  charge  is  named  for  two  or  three  thou- 
sand different  occupancies,  in  each  of  which  the  rate  is  estimated 
in  a  lump  sum,  amounting  in  many  cases  to  several  times  the  rate 
of  the  unoccupied  building,  after  it  has  been  laboriously  con- 
structed from  scores  of  charges  and  credits,  in  many  cases  as 
small  as  one  or  two  cents. 

In  place  of  a  synthesis  of  classified  and  valued  relations,  the 
Universal  Schedule  offers  us  a  volume  of  dicta  which  precludes 
the  exercise  of  other  than  the  purely  mechanical  functions  of 
addition  and  subtraction.  A  basis  tariff  ought  to  be  an  instru- 
mentality for  establishing  intelligent  coexistent  relations,  and 
probably  no  tariff  will  ever  be  constructed  so  complete  as  to 
eliminate  the  necessity  for  personal  judgment  in  its  application. 
That  masterpiece  of  constructive  statesmanship  known  as  the 
United  States  Constitution  provides  for  a  supreme  court  to  inter- 
pret its  provisions,  and  even  Divine  Wisdom  does  not  seem  to 
have  been  able  to  bequeath  to  humanity  a  code  of  morals  that 
does  not  need  constant  expounding. 

With  any  tariff,  rating  itself  must  remain  an  art;  and  it  is  as 
idle  to  expect  that  a  tariff  itself  will  rate  every  variety  of  hazard 
without  the  exercise  of  judgment  as  to  expect  that  a  hoe  will 
raise  a  crop  of  corn  without  intelligent  manipulation. 

The  Universal  Schedule  is  an  ingenious  analysis,  but  as  has 
been  well  said,  **No  number  of  analytical  surmises,  or  even 
truths,  can  make  up  that  synthesis  of  thought  which  alone  can 
be  an  interpretation  of  the  synthesis  of  things." 


Classification  in  General 

Like  the  hero  in  Moliere's  comedy  who  began  the  study  of 
grammar  late  in  life,  and  was  astonished  to  learn  that  he  had  all 
his  life  been  talking  in  prose,  many  fire  underwriters  would 
doubtless  be  surprised  to  learn  that  classification  in  fire  insurance 
has  evolved  into  an  advanced  stage  of  differentiation ;  that  from 
its  earliest  beginnings  it  has  been  constantly  engaged  in  detecting 
differences  and  grouping  like  with  like.  It  is,  perhaps,  a  truism 
to  say  that  in  the  beginning  everything  unexplainable  was  attrib- 
uted to  either  chance  or  supernatural  influence.  Out  of  this 
original  mass  of  the  unknown,  intelligence  has  been  sorting  out 
and  classifying  or  grouping  the  explainable;  and  as  knowledge 
increases,  the  scrap-heap  of  chance  decreases.  The  ability  to 
distinguish  differences,  to  group  like  with  like,  may  be  extremely 
loose,  but  the  endless  process  of  classification  is  to  take  cogni- 
zance of  more  and  more  minute  differences,  and  thus  keep  up  a 
continuous  process  of  differentiation.  To  discard  classification 
because  it  is  not  exact  would  be  to  return  to  the  primitive  con- 
ditions which  underlie  intelligence.  Not  infrequently  the 
greatest  utility  is  derived  from  absurdly  loose  groupings  of  phe- 
nomena. The  alphabet  is  a  classification  of  the  elementary 
sounds  of  speech.  Every  written  language  has  its  own  classifi- 
cation, more  or  less  inexact,  but  in  English  this  classification  is 
notoriously  loose.  Selecting,  for  example,  the  first  letter  of  the 
alphabet,  we  find  it  serves  to  represents  seven  different  sounds, 
as  will  be  seen  in  the  following  words :  any^  able,  air,  at,  arm, 
all,  about. 

In  the  same  way,  nearly  every  letter  which,  theoretically, 
should  stand  for  the  symbol  of  a  single  elementary  sound  is  made 
to  do  duty  for  several  sounds,  and  each  of  these  letters  usurps 
the  functions  of  other  letters,  so  that  we  have  not  only  one  sym- 
bol for  several  sounds,  but  several  symbols  for  one  sound,  with 
the  result  that  most  of  us  spend  our  lives  in  the  impossible  task 

68 


Classification  in  General  69 

of  trying  to  group  these  symbols  accurately — in  other  words,  in 
trying  to  learn  how  to  spell;  but  the  combined  efforts  of  the 
spelling  reformers  have  been  able  to  make  no  material  improve- 
ment in  this  preposterously  loose  classification  of  things  capable 
of  being  grouped  with  scientific  accuracy. 

Again,  these  letter  atoms  are  grouped  together  in  word  mole- 
cules, which  themselves  are  built  up  by  welding  classified  prefixes 
and  suffixes  to  verbal  roots,  just  as  we  construct  individual  rates 
by  uniting  charges  and  credits  to  a  nuclear  basis  rate.  These 
word  molecules,  the  tertiary  results  of  classification,  may  in  turn 
be  used  to  represent  a  wide  range  of  ideas,  many  of  which  are 
antagonistic  to  each  other;  or  on  the  other  hand,  several  words 
may  be  used  to  represent  one  and  the  same  idea.  Again,  the 
significance  of  words  is  constantly  shifting.  We  have  an  instance 
of  this  in  the  recent  metamorphosis  into  an  offensive  sense  of  the 
word  trust.  Word-building  itself  is  an  endless  process  of  classifi- 
cation, for  we  cannot  proceed  without  a  name  for  each  class;  and 
on  the  other  hand,  words  cannot  be  made  faster  than  things  are 
classed. 

But  we  have  in  this  grouping  of  the  phenomena  of  language 
an  illustration  of  the  fact  that  classification,  however  crude,  may 
be  very  useful  in  the  absence  of  something  better. 

Classification  and  reasoning,  or  the  grouping  of  things  and 
the  relationing  of  things,  are  complementary  to  each  other,  and 
have  accompanied  intelligence  from  its  lowliest  beginnings, 
though  classification  is  found  in  living  organisms  before  intelli- 
gence begins,  down  in  the  dim  life-regions  where  conduct  is 
governed  either  by  instinct  or  by  the  reflex  action  in  which  a 
nerve  ganglion  serves  in  the  absence  of  a  brain.  The  reason  for 
this  is  fundamental,  for  *'it  is  a  condition  under  which  only  it  is 
possible  for  any  creature  to  avoid  danger  and  obtain  food,  that 
it  shall  be  differently  affected  by  different  objects." 

In  fire  insurance,  the  classifying  instinct  began  with  the 
detection  of  a  difference  in  hazard  between  frame  and  brick 
buildings,  which  were  separated  at  the  outset  into  two  classes. 
Then  a  difference  was  discovered  between  buildings  and  con- 
tents; next,  differences  among  the  hazards  of  contents.  It  was 
found   that   some    property   resisted   fire   and   was    not    easily 


70  Fire-Rating  as  a  Science 

damaged,  or  was  easily  removed  from  a  burning  building;  other 
property  was  easily  damaged  or  difficult  to  remove;  other  prop- 
erty was  highly  inflammable  and  of  a  nature  to  propagate  fire. 
These  classes  were  grouped  separately  as  preferred,  non-pre- 
ferred, and  hazardous.  Then  the  important  distinction  was 
discovered  between  inherent  hazard  and  exposure.  Then  a  dis- 
tinction was  made  between  the  hazard  of  property  under  constant 
human  protection  and  that  which  was  not,  and  dwellings  were 
classed  apart  from  other  hazards.  Then  fire  departments  were 
grouped  into  standards  according  to  efficiency.  Then  the  rela- 
tions between  the  factors  of  known  parts  of  hazard  were  analyzed 
and  classified  under  arbitrarily  fixed  charges  and  credits,  and  the 
remainder  called  a  basis  rate.  Then  the  law  of  relation  between 
the  basis  rate  and  the  total  hazard  of  each  class  was  inferred, 
and  a  separate  basis  rate  established  for  each  property  class. 

It  may  be  observed  that  all  these  results  achieved  by  classifi- 
cation bear  relations  to  each  other  of  coexistence  and  not  of 
sequence. 

The  upward  progress  of  knowledge  is  comparable  to  a  stair- 
way, of  which  the  runners  supporting  every  step  might  be  called 
classification;  for  classification  begins  with  the  lowest  intelli- 
gence, and  accompanies  its  growth  up  through  every  stage  in  the 
evolution  of  the  reasoning  faculties.  The  philosopher  who 
makes  it  his  business  to  study  all  sciences  must  classify  as  well 
as  the  oyster  which  furnishes  him  food  for  reflection  as  well  as 
digestion.  Every  school  of  philosophy  has  tried  its  hand  at 
classifying  the  different  sciences,  yet  no  two  schools  agree.  The 
reason  for  this  is  that  the  faculty  of  detecting  likeness  and 
unlikeness  is  a  function  of  perception,  and  not  of  reason.  This 
accounts  for  the  fact  that  differences  of  opinion  result  from  every 
attempt  to  classify,  and  in  this  fact  we  find  another  proof  of  the 
relativity  of  all  knowledge. 

Fire  insurance  has  reached  what  might  be  called  a  "wide- 
open"  agreement  in  its  classification  of  coexisting  relations  as 
found  in  our  tariff  system,  because  necessity  has  compelled  it  as 
a  preliminary  to  the  establishment  of  any  rating  system  what- 
ever; but  we  have  not  yet  been  brought  to  a  realization  of  the 
fact  that  there  is  a  difference  between  coexistent  and  sequential 


Classification  in  General  71 

relations,  or  that  sequential  relations  cannot  be  logically  estab- 
lished by  a  periodical  breaking  up  and  rearranging  of  the  coex- 
istent relations  which  have  been  forced  upon  it  by  necessity. 

We  find  an  embryotic  idea  of  classification,  for  the  purpose  of 
establishing  sequential  relations,  in  the  classification  lists  main- 
tained by  individual  companies.  These  lists  serve  the  several 
companies  in  a  general  way  for  their  own  information  as  a  means 
of  following  sequential  relations  between  income  and  outgo  as 
shown  by  the  fluctuation  in  annual  waves  of  loss  and  premium, 
but  this  classification  is  separate  and  distinct  from  that  found  in 
our  tariff  system  of  classified  coexistent  relations. 

With  all  the  bandying  about  of  the  word  '^classification" 
during  recent  years  among  fire  underwriters,  without  any  really 
definite  idea  as  to  the  true  import  of  the  word,  it  is  a  fact  that 
its  ceaseless  influence  has  shaped  and  molded  the  very  soul  and 
body  of  fire  insurance,  which  without  classification  would  be  that 
vague  and  formless  thing  known  as  chance.  But  when  this  word, 
which  in  its  coexistent  aspect  has  been  the  very  life-breath  of 
insurance,  is  mentioned,  there  is  a  shaking  of  heads  and  a 
questioning  of  the  practical  utility  of  classification  in  establishing 
sequential  relations. 

What  these  head-shaking  people  probably  mean,  if  they  know 
what  they  mean,  is  that  classification  in  fire  insurance  can  go  no 
further;  that  its  capacities  have  been  exhausted  in  establishing 
the  coexistent  relations  found  in  tariffs,  and  that  a  function  which 
accompanies  all  intelligence,  from  the  oyster  to  the  philosopher, 
becomes  worthless  in  fire  insurance  the  moment  we  attempt  to 
utilize  it  in  establishing  sequential  relations. 

If  a  child  of  ten  years  should  cease  to  classify,  it  would  con- 
tinue as  long  as  it  lived  to  be  a  ten-year-old  child ;  and  something 
akin  to  this  phenomenon  is  found  to-day  in  the  arrest  of  the 
classifying  instinct  in  the  rating  function  of  fire  insurance. 

The  real  controversy  over  the  much  abused  word  "classifi- 
cation" is  not  over  the  introduction  of  a  new  principle,  but 
whether  a  principle  woven  into  the  very  fiber  of  the  industry,  a 
principle  which  has  imparted  to  it  all  it  has  and  is  that  is  not 
purely  chance,  shall  be  permitted  to  expand  as  a  natural  growth ; 
whether  it  shall  be  fostered  as  a  thing  useful  or  repressed  as  a 


ya  Fire-Rating  as  a  Science 

useless  excrescence.  There  are  many  phases  to  the  manifesta- 
tions of  classification  in  the  rating  problem,  but  the  one  phase 
around  which  interest  has  centered  lies  in  the  proposition  to  use 
the  classified  lists  kept  by  the  several  companies  in  establishing 
combined  statistics  which  will  show  the  actual  results  of  the 
aggregate  experience  of  all  companies  by  classes  year  after  year; 
in  other  words,  show  the  classified  experience  of  the  industry  as 
a  whole  in  its  sequential  relations  as  a  basis  for  the  intelligent 
control  of  rate  waves  as  determined  by  waves  of  fire  destruction. 


The  Individual  Classification  List 

It  is  probable  that  from  the  earliest  days  of  fire  insurance  the 
companies  have  maintained  tabulations  of  their  experience  with 
grouped  hazards.  These  lists  have  slowly  expanded  in  differing 
degrees,  though  some  have  reached  a  far  more  advanced  stage  of 
differentiation  than  others.  In  the  primitive  days  when  each 
company  not  only  had  the  privilege  of  making  its  own  rates,  but 
from  lack  of  association  was  compelled  to  do  so,  when  compe- 
tition was  so  small  that  it  could  make  rates  which  insured  a  wide 
margin  of  profit,  these  lists  served  as  a  crude  scale — something 
like  the  farmer's  fence-rail  and  stone — for  the  quantitative  meas- 
urement of  class  hazards  in  their  sequential  relations  as  indicated 
by  individual  experience;  but  in  these  days  of  competition,  when 
a  company  is  compelled  to  keep  in  the  swim  by  carrying  all 
classes  of  property,  of  every  grade  of  desirability,  in  deference 
to  the  wishes  of  more  and  more  exacting  agents,  these  individual 
classification  lists  have  fallen  into  a  sort  of  innocuous  desuetude, 
surviving  like  the  coccyx  and  vermiform  appendix  as  the  remains 
of  organs  that  served  their  purpose  during  some  earlier  stage  of 
evolution.  Kept  up  at  a  great  expenditure  of  time  and  money, 
and  carefully  guarded  among  the  secret  and  sacred  archives  of 
each  company,  it  would  be  difficult  to  determine  what  intelligent 
end  these  lists  serve  at  the  present  time  that  would  not  be  as  well 
served  by  a  Roman  soothsayer's  chicken-gizzard.  Their  utility 
as  a  practical  guide  in  determining  the  relative  profitableness 
of  classes  may  be  inferred  from  the  following  tabulation  of  the 
comparative  experience  shown  by  a  number  of  these  individual 
lists  for  the  same  five-year  period.  The  figures  in  the  column 
marked  *'low"  show  the  loss  ratio  of  the  company  having  the 
most  favorable  experience,  and  the  figures  in  the  column  marked 
*'high"  show  the  loss  ratio  of  the  company  having  the  most 
unfavorable  experience,  with  each  of  the  classes  designated  by 
numbers.    The  column  marked  "combined"  shows  the  combined 

73 


74 


Fire-Rating  as  a  Science 


loss  ratio  of  all  the  companies  on  the  same  class  for  the  same 
period : 


Class  No. 


I. 

2. 

3- 
4 

I 

7- 
8. 

9 

lo. 
II- 

12- 

13 
14- 

\k 
\l. 

19. 
20. 
21. 
22. 

23 

24. 

26. 
27. 
28. 
29. 
30 
31 
32 
33 


Loss  Ratios  Shown  by              Loss 

Ratios 

Individual  Experience                Sho 

wn  by 

/^„„ 

bined 
jrience 

Low 

High              Exp 

,00 

I. II 

53 

.10 

2.13 

54 

.00 

I-3I 

43 

.06 

1.88 

66 

.18 

1.69 

50 

.03 

.92 

60 

.05 

.91 

60    . 

.19 

1.05 

67 

.10 

i^37 

^S 

•34 

1^73 

5« 

.12 

1.32 

74 

.16 

1.79 

63 

.21 

1-35 

44 

.18 

'■^ 

77 

.02 

25 

.01 

2.11                I 

21 

.08 

2.46 

53 

•43 

4.95 

97 

.19 

I. II 

72 

.04 

1.02 

P 

•33 

1.50 

61 

.29 

1.05 

57 

.16 

1.04 

50 

.29 

1.76 

62 

.18 

1.03 

46 

•13 

.86 

52 

•30 

2.64 

64 

.30 

1.65 

.67 

.22 

4.46 

97 

•17 

.67 

43 

.03 

2.CX) 

2° 

.10 

2.16 

.81 

.11 

1.77 

.47 

These  classes,  selected  from  the  lists  at  random,  show  that 
with  each  and  every  class  one  company  had  a  very  low  loss  ratio, 
while  another  company  had  a  loss  ratio  that  would  bring  swift 
ruin  had  it  not  had  a  more  favorable  experience  with  other 
classes.  A  mere  glance  down  the  two  columns  marked  "low" 
and  "high"  will  show  the  utter  worthlessness  of  the  separate 
experience  of  a  single  company  as  a  criterion  to  the  average  loss 
ratio  of  each  class,  while  on  the  contrary,  a  comparison  of  these 


The  Individual  Classification  List  75 

individual  experiences  with  the  column  marked  "combined" 
shows  that  there  is  an  established  mean  which,  if  known,  would 
constitute  a  reliable  standard  for  determining  adequate  class 
rates. 

But  further  examination  into  these  individual  lists  reveals  an 
inaccuracy  and  wastefulness  of  method  which  would  destroy  their 
reliability,  even  were  the  experience  of  each  company  broad 
enough  to  constitute  a  reliable  criterion.  At  a  rough  estimate, 
one  hundred  and  fifty  companies  maintain  these  classification 
lists,  at  a  heavy  expense  for  clerical  work.  During  a  single  year 
these  companies  receive,  let  us  say,  a  total  of  five  million  daily 
reports  of  policies  issued,  each  of  which  contains  a  verbatim  copy 
of  the  written  portion  of  a  policy.  The  necessity  for  determining 
the  proper  class  of  each  daily  report  received  requires  that  it  be 
carefully  scanned  and  its  class  number  noted  upon  it,  in  order 
that  it  may  be  properly  entered  upon  the  records.  This  work  is 
necessarily  done  in  a  hurried  manner  by  a  clerk  or  examiner  who 
cannot  possibly  give  much  time  or  thought  to  each  daily  report. 
In  many  cases  it  is  impossible  to  tell  from  the  written  description 
how  the  risk  should  be  classed.  In  thousands  of  cases,  from  fifty 
to  one  hundred  companies  receive  daily  reports  covering  the 
same  property,  which,  in  the  hurry  of  current  necessity,  are 
entered  haphazard  in  any  one  of  a  dozen  different  classes  on  the 
ledgers  of  the  several  companies,  and  the  same  work  thus  mani- 
folded from  fifty  to  one  hundred  times  creates  a  corresponding 
liability  to  error.  A  loss  on  a  single  risk  wrongly  classified 
destroys  the  value  of  the  records  of  two  classes.* 

Another  important  element  of  unreliability  in  these  individual 
lists  results  from  the  constant  fluctuation  of  rates.  The  lists 
contain  the  total  premiums  received  and  the  losses  paid  on  each 
class,  a  comparison  of  which  is  supposed  to  reveal  the  loss  ratio 
of  the  class.  This  loss  ratio,  however,  is  only  useful  in  deter- 
mining the  adequacy  of  rates;  and  with  rates  constantly  changing, 
the  standard  ceases  to  be  a  standard,  and  tabulated  experience 
without  a  standard  of  comparison  is  worthless. 

*In  the  office  of  a  prominent  insurance  company  a  five-thousand-dollar  line  was 
recently  classified  as  a  printing-office.  When  a  loss  occurred,  it  was  accidentally  discovered 
that  the  risk  belonged  to  an  entirely  different  class.  This  single  error  affected  the  company's 
loss  ratio  with  the  one  class  twenty-five  per  cent,  and  with  the  other  nearly  one  hundred  per 
cent. 


76  Fire-Rating  as  a  Science 

Let  us  take  for  illustration  the  rates  on  the  dwelling  class, 
which  have  declined  throughout  a  large  portion  of  the  Northwest 
from  twenty-five  to  thirty-five  per  cent  during  the  period  named, 
assuming  the  premiums  and  losses  on  the  same  amount  at  risk  to 
have  been  as  follows : 

Year                                                                 Premiums  Losses 

1892 $100,000  $50,000 

1893 90,000  40,000 

1894 80,000  45,000 

1895 75,000  60,000 

1896 66,000  50,000 

Total $411,000  $245,000 

Total  loss  ratio,  sixty  per  cent. 

Assuming  the  normal  loss  ratio  of  the  class  to  be  fifty-five  per 
cent,  the  average  loss  of  sixty  per  cent  shown  by  the  above  figures 
would  indicate  that  dwellings  ought  to  be  advanced  about  five 
per  cent,  but  if  we  compare  the  last  year's  premiums  with  the 
losses  of  that  year,  we  find  the  loss  ratio  to  be  about  seventy-six 
per  cent,  and  that  dwellings  should  be  advanced  about  twenty- 
one  per  cent  from  current  rates,  hence,  any  attempt  to  fix  rates 
from  the  figures  shown  would  be  met  with  the  question.  From 
what  point  shall  rates  be  modified — from  the  highest  point  or  the 
lowest  point,  or  from  some  intermediate  point?  In  other  words, 
the  value  of  the  figures  for  quantitative  reasoning  is  destroyed 
by  the  vacillation  of  one  of  the  quantities  necessary  to  the  com- 
parison. 

Another  element  of  unreliability  in  the  lists  of  individual 
companies  lies  in  the  non-concurrent  grouping  of  classes.  In 
this  respect,  probably  no  two  agree;  and  in  the  constant  evolu- 
tion of  hazards  (in  the  absence  of  any  common  source  of  infor- 
mation), lists  are  in  constant  course  of  change,  as  determined  by 
the  judgment  of  classification  clerks  under  urgent  necessity  for 
immediate  action. 

In  view  of  the  uncertainty  of  grouping,  the  uncertainty 
whether  a  risk,  even  when  properly  grouped,  will  get  into  the 
group  to  which  it  belongs,  and  the  destruction  of  the  standard  of 
measurement  caused  by  rate  fluctuations,  the  individual  classifi- 
cation list  as  a  basis  for  quantitative  measurement  is  by  several 


The  Individual  Classification  List  77 

degrees  more  crude  and  primitive  than  the  farmer's  fence-rail 
and  stone;  but  as  the  latter  contained  the  germ  which  has  evolved 
into  the  chemist's  scales  which  will  weigh  an  eyelash,  these  indi- 
vidual company  classification  lists  constitute  the  embryo  which 
must  ultimately  evolve  into  a  logical,  uniform,  and  combined 
system  for  the  quantitative  measurement  of  sequential  relations. 


Uniform  and  Combined  Classijfication 

Ordinary  candor  compels  the  admission  that  the  classification 
of  coexistent  relations  found  in  our  present  tariff  system  consti- 
tutes the  only  feature  of  fire  insurance  which  gives  it  the  slightest 
right  to  claim  that  it  is  not  a  world-wide  game  of  guess.  The 
same  degree  of  candor  will  not  permit  us  to  deny  that,  as  a  prac- 
tical guide  in  accepting  or  rating  risks,  company  classification 
lists  in  severalty  are  worse  than  useless,  because  in  their  limited 
way  they  are  misleading.  It  should  be  borne  in  mind,  however, 
that  these  lists  show  a  distinctly  different  phase  of  classification 
from  that  found  in  our  tariff  system,  for  the  reason  that  they 
constitute  the  embryo  of  a  system  for  establishing  sequential 
relations. 

A  careful  study  of  these  lists  shows  that,  with  all  their  imper- 
fections, they  contain  no  fault  that  is  not  easily  and  inexpensively 
remediable.  To  co-ordinate  these  lists  into  a  uniform  grouping 
of  classes  and  combine  the  individual  experience  of  each  company 
into  grand  aggregates  showing  the  annual  experience  of  all  com- 
panies with  each  class,  would  require  neither  violation  of  scien- 
tific procedure  nor  departure  from  methods  suggested  rather  than 
established  through  these  individual  classification  lists.  There 
can  be  no  verification  of  sequential  relations  (which  are  the 
combined  effect  of  annual  fire  destruction  and  the  coexistent 
relations  established  through  basis  tariffs)  except  through  uniform 
and  combined  classification.  This  is  the  statistical  basis  upon 
which  fire-rating  as  a  science  of  sequential  measurement  must 
rest. 

It  would  seem  to  be  a  reflection  upon  the  intelligence  and 
honesty  of  the  fire  underwriting  community  that  during  the  past 
quarter  of  a  century  every  effort  to  bring  about  uniform  and 
combined  classification  for  the  purpose  of  establishing  intelligent 
sequential  relations  should  have  been  thwarted  by  a  silent  oppo- 
sition which  has  seemingly  disdained  to  argue  the  question.     It 

78 


Uniform  and  Combined  Classification  79 

has  been  charged  that  this  opposition  emanates  from  a  belief  on 
the  part  of  the  management  of  some  of  the  larger  companies  that 
under  existing  conditions  these  companies  possess  advantages 
which  would  be  lost  by  the  revelation  of  class  averages.  It  is 
hard  to  believe,  however,  that  the  intelligence  which  has  brought 
these  companies  to  the  front  could  be  blind  to  the  compensating 
advantages  which  would  accrue  from  the  placing  of  fire  insurance 
among  the  recognized  and  legitimate  branches  of  commercial 
activity.  At  most,  combined  classification  would  simply  establish 
averages  derived  from  the  experience  of  all.  It  would  not  unseat 
common  sense,  nor  dethrone  the  individual  judgment,  which 
itself  has  been  well  defined  as  a  finer  and  more  discriminating 
classification.  The  establishment  of  these  averages  would  leave 
even  greater  advantages  to  underwriting  ability,  capital,  and 
established  reputation  than  under  existing  conditions,  which 
enable  unscrupulous  and  plunging  methods  not  only  to  upset  the 
possibility  of  legitimate  underwriting,  but  not  infrequently  to  win 
a  greater  financial  success.  Greater  disparities  are  found  in  the 
comparative  success  of  banks,  merchants,  and  manufacturers, 
than  among  fire  insurance  companies,  because  legitimate  enter- 
prise gives  ample  scope  for  the  qualities  necessary  for  success. 
Without  doubt,  selfishness,  inertia,  and  ignorance  are  largely 
responsible  for  the  failure  of  fire  insurance  to  realize  the  benefits 
of  combined  classification,  though  it  would  be  as  illogical  to 
censure  the  motives  of  the  fire  underwriting  community  generally 
as  to  censure  the  community  at  large  for  its  inertia  in  many 
important  matters  of  reform  which  do  not  admit  of  logical  dis- 
cussion. *' Direct  complicity  with  human  affairs  is  not  infre- 
quently a  hindrance  to  the  scientific  investigation  of  phenomena. 
Even  the  axioms  of  geometry  would  be  disputed  or  ignored  if 
men's  passions  or  interests  were  concerned  with  them." 

The  English-speaking  peoples  adhere  to  an  orthography  that 
is  the  despair  and  wonder  of  the  world.  We  boast  of  our  decimal 
currency,  but  refuse  to  adopt  a  decimal  system  of  weights  and 
measures,  while  the  complacent  Briton  refuses  to  adopt  the 
decimal  system  for  either  his  currency,  weights,  or  measures. 
During  the  slow  evolution  of  single-entry  and  then  of  double- 
entry  book-keeping,  the  English  government  stubbornly  adhered 


8o  Fire- Rating  as  a  Science 

to  a  primitive  system  of  keeping  accounts  by  cutting  notches  in 
sticks.  It  would  probably  be  using  this  system  yet  had  not  a 
conflagration  in  1884  burned  up  all  its  exchequer  tallies.  Inertia 
hath  its  uses,  however.  "The  man  who  will  not  look  at  the  new 
moon,  out  of  respect  to  that  ancient  institution,  the  old  moon," 
was  not  created  in  vain.  Perhaps  it  is  fortunate  that  combined 
classification  was  not  started  too  soon,  for  a  false  start  might 
have  brought  the  system  into  disrepute,  and  it  is  always  easier  to 
start  anew  than  to  undo  and  patch  up  a  system  full  of  errors. 
To-day,  however,  fire  insurance  is  in  the  position  of  the  British 
government  when  its  exchequer  tallies  were  burned.  Many 
states  have  destroyed  our  rating  system,  such  as  it  is,  by  anti- 
compact  laws;  many  others  are  threatening  to  do  so,  and  a  new 
start  is  inevitable.  If  we  start  along  lines  that  cannot  be  justi- 
fied by  scientific  reasoning  at  every  point,  so  much  the  worse  for 
us,  for  we  will  ultimately  be  compelled  to  tear  down  our  system 
and  rebuild  from  the  foundation. 


Class  Differentiation 

The  classification  lists  of  some  companies  contain  not  over 
twenty-five  classes;  others  as  high  as  two  hundred  and  fifty- 
classes.  In  the  construction  of  a  uniform  list  to  be  used  by  all 
companies,  it  is  an  important  question  how  far  differentiation 
ought  to  be  carried  to  achieve  the  best  results. 

From  the  most  reliable  data  at  present  obtainable,  it  may  be 
inferred  that,  excluding  farm  property,  the  two  great  property 
groups,  known  as  mercantile  and  dwelling,  produce  about  two- 
thirds  of  the  fire  insurance  premiums  received  by  the  companies, 
and  it  would  be  possible  to  select  fifteen,  or  at  most  twenty, 
property  classes  which  produce  ninety  per  cent  of  the  total 
premiums  of  the  country. 

It  is  obvious  that  uniform  classification  of  these  few  groups 
would  embody  so  nearly  all  property  as  to  be  a  practical  working 
basis. 

On  the  other  hand,  among  unusual  risks,  we  find  in  some 
cases  perhaps  less  than  a  dozen  establishments  in  the  entire 
country.  In  these  unimportant  classes  it  is  impossible  to  establish 
an  average.  They  can  be  intelligently  rated  only  through  their 
resemblance  in  hazard  to  established  features  in  established 
classes,  and  this  necessitates  their  grouping  as  a  miscellaneous 
class. 

Should  the  companies  adopt  uniform  classification,  the  first 
step  dictated  by  intelligence  would  be  to  classify  each  risk  when  it 
is  rated^  and  print  its  class  number  in  the  local  tariff.  This  would 
not  only  save  an  immense  amount  of  clerical  work  in  company 
offices,  but  ensure  the  entry  of  each  risk  in  its  proper  class  on  the 
records  of  every  company  interested.  As  the  classifying  of  each 
risk  when  rated  would  obviate  the  necessity  of  classifying  each 
daily  report  in  every  office,  it  would  matter  little  whether  the 
uniform  classification  list  was  long  or  short,  complicated  or  sim- 
ple, as  the  necessity  for  consulting  it  in  company  offices  would  cease. 

8i 


82  Fire-Rating  as  a  Science 

Again,  certain  classes,  while  seemingly  unimportant  in  com- 
parison with  the  aggregate  business  of  the  country,  are  important 
in  certain  sections,  as  cotton  risks  in  the  South,  grain-elevators 
and  flour-mills  in  the  North,  and  textile-mills  in  the  East.  These 
classes,  while  of  minor  importance  in  the  aggregate,  are  entitled 
to  careful  classification  as  being  important  sectional  industries. 
There  is  an  intelligent  mean  between  the  two  extremes  of  differ- 
entiation which  can  be  reached  through  conference,  though  the 
objections  to  a  highly  differentiated  list  vanish  in  view  of  the  fact 
that  when  one  list  is  used  by  all  companies  it  will  become  possible 
to  classify  each  risk  when  rated  and  print  its  class  number  in  the 
local  tariff.  '*The  continuous  equilibration  of  every  organism 
with  its  environments  is  an  ever-present  necessity, ' '  however,  and 
it  may  be  expected  that  the  necessities  of  the  industry  will  exact 
an  ever-increasing  nicety  of  distinction. 

It  is  as  impossible  to  formulate  a  classification  list  which  will 
last  forever  and  a  day  as  it  has  been  found  to  formulate  a  consti- 
tutional government  through  a  written  instrument  which  will  not 
need  to  be  changed  to  meet  changing  conditions.  It  is  safe  to 
assume,  however,  that  the  more  complete  the  differentiation  at 
the  outset,  the  fewer  the  patches  that  will  be  needed  in  future. 


Rate  Standard 

With  all  companies  maintaining  uniform  classification,  the 
loss  ratio  derived  from  a  tabulation  of  their  experience  would  not 
be  the  true  loss  ratio  if  rates  had  fluctuated  during  the  period 
tabulated.  With  the  equalization  of  class  rates  liable  to  result 
from  combined  classification,  the  ascertainment  of  accurate  ratios 
becomes  more  important  in  proportion  as  class  rates  gravitate 
toward  a  uniform  margin  of  profit,  which  means  a  small  margin. 
A  comparison  of  premiums  and  losses  with  the  aggregate  amount 
at  risk  would  show  the  average  rate  and  average  loss  to  risk  for 
each  class,  but  under  present  conditions  neither  of  these  ratios 
would  be  of  any  service  in  determining  the  important  question, 
How  much  shall  rates  on  a  given  class  be  raised  or  lowered  to 
maintain  a  reasonably  uniform  margin  of  profit  year  after  year, 
and  equilibrate  the  profits  of  each  class  with  the  profits  of  other 
classes?  All  science  recognizes  the  fact  that  quantitative  meas- 
urement of  relations  must  be  made  by  the  aid  of  some  recognized 
standard  of  comparison,  and  fire-rating  as  a  science  would  not  be 
exempt  from  this  law.  The  preceding  question  can  be  answered 
in  but  one  way.  Our  tariffs  of  coexistent  relations  must  be 
allowed  to  remain  coexistent  as  a  fixed  and  permanent  standard 
of  comparison.  No  matter  how  often  or  how  widely  our  rates, 
may  be  changed  with  reference  to  this  standard,  the  standard 
itself  must  be  inviolable.  This  does  not  signify  that  the  standard 
should  not  be  modified  to  embrace  the  innovations  in  hazard 
which  will  never  cease,  for  these  innovations  are  the  results  of 
a  slow  evolution  which  will  never  appreciably  affect  the  accuracy 
of  statistical  aggregates. 

To  stand  still  in  fire  insurance  is  to  become  obsolete.  A 
standard  tariff  should  be  instinct  with  life-growth  and  adapta- 
bility. The  whole  idea  of  a  rating  science  based  upon  the  law  of 
rhythm  means  mobility.  There  can  be  no  finality  in  standard 
tariffs,  for  they  must  be  adaptable  to  future  exigencies.     On  the 

83 


84  Fire-Rating  as  a  Science 

other  hand,  local  tariffs  constructed  from  these  standards  must 
not  be  changed  to  suit  whims  or  exactions  of  individuals  or  com- 
munities; they  must  reflect  existing  conditions,  and  be  changed 
only  as  actual  alterations  occur  in  the  physical  hazard  of  each  risk. 

In  this  scientific  necessity  for  fixed  standards,  without  which 
quantitative  measurement  is  impossible,  lies  deliverance  from 
most  of  the  difficulties  arising  from  our  persistent  attempts  to 
ignore  this  necessity. 

Theoretically,  we  make  permanent  rates  based  upon  a  claimed 
average  class  experience.  Practically,  rates  are  not  and  never 
can  be  permanent,  and  as  a  matter  of  fact  we  know  little  more 
of  our  combined  class  experience  than  the  people  who  buy  our 
policies.  Manufacturers  universally  recognize  the  necessity  for 
prompt  and  systematic  changes  in  their  selling  prices  by  percent- 
age changes  which  will  not  disturb  or  disorganize  their  published 
price-lists.  In  our  local  tariffs  we  have  by  far  the  most  expen- 
sive and  extensive  price-lists  of  any  industry  in  the  world,  and  yet 
we  have  steadily  refused  to  recognize  any  system  for  changing 
our  selling  price  which  did  not  make  it  necessary  to  destroy  and 
re-create  our  price-lists.  While  in  theory  we  have  steadily  ignored 
the  possibility  of  any  system  of  percentage  rate-changes,  com- 
petition is  constantly  forcing  us  into  percentage  changes  in  all 
parts  of  the  country,  until  they  have  become  the  rule  rather  than 
the  exception.  It  is  admitted  that  physical  changes  in  risks  will 
never  cease,  and  that  constant  revision  of  local  tariffs  will  always 
be  necessary  to  meet  these  changes ;  but  aside  from  this  revision 
of  local  tariffs,  made  necessary  by  actual  changes  in  physical 
hazard,  there  is  an  equally  constant  necessity,  arising  from  the 
exigencies  of  competition,  which  makes  sweeping  rate  changes 
in  the  selling  prices  of  indemnity  necessary  in  classes,  and  occa- 
sionally in  all  classes,  in  towns,  cities,  or  states.  When  we  do 
make  a  percentage  advance,  people  who  by  persistent  jewing  or 
bullying  have  secured  competitive  rates  are  advanced  less  than 
people  who  have  paid  tariff  rates,  without  question;  but  aside 
from  this  injustice  resulting  from  our  percentage  changes,  our 
tariffs  are  disorganized  by  such  changes,  relations  are  destroyed, 
and  every  few  years  a  complete  rerating  of  a  city  or  state  becomes 
necessary,  to  get  out  of  the  chaos  created  by  disintegrating  fac- 


Rate  Standard  85 

tors  which  again  begin  their  swift  work  as  soon  as  new  rates  are 
made. 

All  these  illogical  results  of  an  illogical  system  which  refuses 
to  recognize  the  necessity  for  systematic  rate  modifications  might 
be  avoided  through  local  tariffs  containing  estimated  relations  of 
hazard  to  be  used  as  a  basis  for  systematic  rate  modifications  by 
percentages ;  for  percentage  changes  from  standards  would  affect 
all  policy  holders  equitably,  instead  of  rewarding  the  rate  cheap- 
ener  at  the  expense  of  other  people.  In  this  simple  expedient 
lies  the  panacea  for  our  diseased  rates,  but  its  success  depends 
upon  two  things:  First,  uniform  classification  by  all  partici- 
pating companies;  second,  the  appearance  of  the  class  number 
of  each  risk  in  local  tariff  as  a  means  of  concerted  rate  modifi- 
cations. The  second,  however,  is  in  a  manner  independent  of 
the  first.  Whether  we  adopt  uniform  and  combined  classification  or 
not^  there  seems  to  be  no  reason  why  the  companies  should  not  adopt  a 
classification  for  rating  purposes^  and  publish  all  future  local  tariffs 
with  the  class  number  opposite  each  risk.  This  would  at  least  give 
.them  flexible  rates,  which  could  be  changed  by  percentage 
announcements  without  destroying  tariffs  of  coexistent  relations 
established  at  so  great  an  expenditure  of  time  and  money. 

It  has  been  argued  that  the  public  has  no  more  right  to  know 
the  cost  of  our  goods  than  we  have  to  know  the  cost  price  of 
other  people's  goods;  but  we  are  quasi-public  servants;  our  cost 
as  a  whole  is  published  to  the  world  at  the  end  of  each  year. 
The  public  learns  from  many  sources  that  on  some  classes  we 
make  large  profits,  and  on  others  large  and  constant  losses,  and 
each  man  suspects  that  he  is  in  the  class  that  is  helping  to  pay 
for  other  people's  insurance.  Suspicions  of  this  sort  are  the 
natural  result  of  a  system  in  which  injustice  is  not  only  inherent 
but  unavoidable.  Under  any  system  admitting  of  prompt  rate 
changes,  profits  on  all  classes  would  have  a  tendency  toward 
uniformity;  and  nothing  could  do  more  to  allay  the  suspicions 
which  create  bargain-hunting  for  fire  indemnity  than  to  let  the 
world  know  just  what  our  profits  are  on  each  class.  We  have 
far  less  to  fear  from  an  honest  publicity  than  from  the  suspicions 
generated  in  the  public  mind  by  an  ignorance  of  the  facts. 

This  brings  us  to  the  consideration  of  the  question  as  to  what 
basis  should  be  adopted  as  the  rate  standard. 


What  Shall  the  Standard  Be? 

In  the  light  of  experience,  every  fire  underwriter  must  realize, 
whether  he  admit  it  or  not,  that  fire  rates  must  always  be  in  con- 
stant process  of  adjustment.  Our  past  treatment  of  the  rating 
problem  has  been  like  that  of  a  physicist  who  should  attempt  to 
deal  with  a  fluid  by  the  law  of  solids. 

The  object  of  scientific  rating  might  be  stated  as  the  main- 
tenance of  logical  coexistent  relations  as  a  permanent  basis  or 
standard  for  the  measurement  of  the  sequential  relations  found 
in  the  form  of  wave  motion  known  as  the  annual-cost  wave,  and 
the  modification  of  this  annual-cost  wave  through  an  ancillary 
rate  wave  into  dimensions  that  will  be  endurable  to  purchasers 
of  indemnity. 

The  mariner  who  is  tossed  skyward  on  the  crest  of  an 
approaching  wave,  to  be  plunged  into  the  gulf  as  the  wave 
recedes,  knows  that  there  is  a  sea-level  which  is  the  average  of 
all  the  waves,  and  the  sextant  with  which  he  takes  his  reckonings 
is  constructed  to  maintain  a  parallel  with  the  sea-level.  Stand- 
ard estimates  of  hazard  based  upon,  say,  a  ten-year  experience  in 
fire  insurance  would  be  to  the  annual-cost  wave  what  tLe  sea-level 
is  to  its  storm-tossed  surface — a  certain  base  from  which  to  take 
our  bearings ;  but  the  question  is.  What  is  the  natural  base  from 
which  we  must  reckon?  As  the  sailor  takes  his  bearings  from 
the  sextant  while  it  is  borne  alternately  above  and  below  the  sea- 
surface,  so  we  can  take  our  bearings  from  any  given  level  above 
or  below  cost,  or  at  cost  itself.  It  is  only  necessary  to  assume  a 
level  and  maintain  it  as  a  permanent  standard  of  reckoning,  be  it 
above,  below,  or  at  the  actual  sea-level  of  the  average  cost  com- 
posed of  losses  and  expenses. 

For  practical  purposes,  as  a  standard  of  comparison,  exact- 
ness is  not  essential ;  for  as  before  stated,  all  standards  are  arbi- 
trary. Even  if  in  the  attempt  to  establish  cost  the  basis  of  one 
class  were  slightly  above  and  another  slightly  below  cost,  the 

86 


What  Shall  the  Standard  Be?  87 

basis  in  either  case  would  answer  equally  well,  either  permanently 
or  temporarily,  as  a  standard  of  comparison,  bearing  in  mind  that 
the  object  of  this  standard  is  simply  to  determine  relations,  to 
learn  at  stated  periods  what  percentage  we  ought  to  raise  or 
lower  rates  as  compared  with  this  standard  in  order  to  maintain 
sequential  relations  between  class  rates  and  their  annual-cost 
wave. 

While  the  result  would  be  the  same  whether  we  select  an  arbi- 
trary standard  or  cost  itself,  there  are  strong  reasons  why  the 
standard  selected  should  as  nearly  as  possible  be  cost  itself,  if  we 
keep  in  view  the  fact  that  we  are  simply  seeking  an  average  line 
as  a  standard  of  comparison. 

With  the  present  trend  of  legislation,  the  publication  of  tariff 
rates  will  probably  be  interdicted  in  every  western  and  southern 
state  in  the  early  future,  and  the  companies  have  before  them  the 
alternative  of  giving  up  all  further  attempts  to  establish  rates,  or 
of  devising  some  plan  through  which  they  can  maintain  statistical 
landmarks  which  will  not  be  in  violation  of  statutory  law. 

The  publication  of  local  tariffs  of  estimated  cost  relations 
based  upon  the  aggregate  experience  of  all  or  of  any  considerable 
number  of  companies  could  not  be  construed  as  a  violation  of  the 
letter  or  spirit  of  existing  statutory  law  in  any  state.  There  could 
be  no  agreement  as  to  securing  these  estimates  as  rates^  because 
being  simply  estimates  of  coexistent  relations  they  would  not  in 
any  sense  be  rates.  Any  agreement  among  the  companies  would 
necessarily  have  to  be  an  agreement  regarding  established  ratios 
of  profit  on  these  estimates  of  cost  relations;  and  with  informa- 
tion based  upon  actual  statistics,  it  is  questionable  whether 
agreements  would  be  necessary.  It  happens  that  in  most  of  the 
states  affected  by  anti-compact  laws  the  aggregate  business  is 
made  up  of  a  small  number  of  classes.  On  a  rough  estimate, 
leaving  out  farm  risks,  over  nine-tenths  of  all  the  insurable 
property  in  Iowa,  Kansas,  Nebraska,  North  and  South  Dakota, 
and  Illinois  (outside  of  Chicago)  consists  of  dwellings,  mercantile 
risks,  and  grain.  In  Michigan,  Wisconsin,  and  Minnesota,  the 
same  proportion  would  be  found  to  consist  in  dwellings,  mercan- 
tile risks,  and  lumber.  In  Texas,  Arkansas,  and  many  other 
southern  states,  dwellings,  mercantile  risks,  cotton,  and  lumber. 


8  8  Fire-Rating  as  a  Science 

In  Kentucky  and  Tennessee,  dwellings,  mercantile  risks,  tobacco, 
and  whisky.  In  fact,  in  the  entire  western  country,  Ohio  and 
Indiana,  as  manufacturing  states,  are  probably  the  only  ones 
which  contain  more  than  ten  to  fifteen  per  cent  of  insurable  prop- 
erty outside  of  the  classes  named,  and  it  might  be  said  that 
throughout  the  Western  and  Southern  states  practically  all  insur- 
able property  would  be  embraced  in  about  twenty  classes. 

The  publication  of  local  tariff  estimates  of  coexistent  relations, 
embracing  these  classes  alone,  would  establish  for  the  first  time 
a  reliable  basis  of  statistical  information,  and  the  announcement 
by  a  single  prominent  company  to  its  agents  of  its  minimum 
profit  on  a  few  important  classes  would  practically  establish  a 
minimum  rate  for  nine-tenths  of  the  business  in  the  Mississippi 
Valley,  without  other  definite  agreement. 

It  is  true,  however,  that  in  considering  fire-rating  as  a  science 
it  is  necessary  to  take  into  consideration  every  class  that  pro- 
duces a  sufficient  volume  of  premiums  to  establish  an  average,  and 
it  is  proper  to  inquire  whether  we  can  construct  estimates  of  cost 
relations  with  an  approximation  sufficiently  close  to  the  truth  to 
entitle  them  to  be  so  called. 


The  Establishment  of  Cost  Estimates 

Theoretically,  there  is  but  one  average  cost  for  each  class  in 
the  United  States.  Practically,  fire  insurance  is  not  transacting 
business  in  the  United  States,  but  in  forty-five  states,  each  of 
which  insists  upon  being  treated  as  an  independent  sovereignty. 
Even  if  state  lines  could  be  wiped  out,  the  loss  ratio  of  different 
sections,  or  even  different  parts  of  the  same  state,  would  differ 
on  account  of  climatic  and  social  conditions;  but  it  is,  perhaps, 
a  good  thing  from  the  standpoint  of  system  that  state  boundaries 
do  exist,  as  these  boundaries  divide  the  country  into  geographical 
areas  with  similar  characteristics,  thus  enabling  us  through  state 
basis  schedules  to  establish  coexistent  relations  in  hazard  with 
reference  to  space  areas  having  comparatively  homogeneous  con- 
ditions. 

Basis  tariffs  are  in  one  sense  classified  analyses  of  fire  hazard. 
These  analyses  as  to  form  and  method  should  be  uniform  for  the 
entire  country.  In  other  words,  there  is  an  obvious  necessity 
for  a  national  basis  tariff  as  a  central  standard  of  comparison  in 
bringing  about  uniformity  of  analysis  and  arrangement,  and  pre- 
serving consistent  relations  among  state  tariffs  to  each  other. 
In  this  way  only  can  consistency  be  maintained  in  basis  rates, 
charges,  credits,  standards  of  construction,  protection,  etc.,  in 
each  state  tariff  with  relation  to  other  state  tariffs.  Unfortu- 
nately, the  Universal  Schedule,  for  reasons  stated,  is  not  available 
for  this  purpose.  The  real  work  of  constructing  a  national 
schedule  of  coexistent  relations  remains  to  be  done;  and  in  con- 
structing this  as  the  basis  of  a  scientific  system  of  rating,  it  will 
be  necessary  to  bear  in  mind  that  it  is  too  late  to  change  the 
structural  nature  of  what  has  been  a  natural  and  inevitable 
growth  in  an  activity  seeking  to  adapt  itself  to  its  environments. 
Science  does  not  destroy,  but  conserves  and  utilizes  all  available 
material. 

In  the  construction  of  this  national  tariff,  an  exact  estimate  in 

89 


90  Fire-Rating  as  a  Science 

dollars  and  cents  of  either  basis  rate,  charge,  or  credit  is  not  a 
sine  qua  non^  for  the  establishment  of  logical  coexistent  relations 
is  the  real  end  sought.  These  relations  being  once  established 
in  a  fundamental  tariff,  it  follows  that  similar  relations  will  ensue 
in  the  state  tariffs  constructed  by  percentage  modifications  of  it. 

The  construction  of  state  tariffs  from  this  central  tariff  would 
consist  in  such  percentage  change  of  each  charge,  credit,  and 
basis  rate  as  would  give  coexistent  relations  reasonably  close  to 
average  state  cost  of  each  class. 

State  tariffs  built  in  this  way  would  in  turn  become  the  stand- 
ard of  relations  for  each  state,  and  in  like  manner  it  would  be 
immaterial  whether  they  were  too  high  or  too  low,  because  the 
function  of  these  tariffs  would  be  to  establish  reasonably  true  rate 
relations  among  individual  risks  in  local  tariffs.  Finally,  local 
tariffs  constructed  from  these  state  tariffs,  being  an  effect,  would 
necessarily  show  similar  relations,  and  they  would  in  turn  become 
the  standard  from  which  class  rates  could  be  changed  by  percent- 
age announcements  from  the  companies  as  determined  by  past 
experience  with  each  class  for  any  given  period. 

It  will  be  noted  that  this  does  not  give  us  established  rates; 
on  the  contrary,  as  a  system  it  permits  the  abolishment  of  the 
overworked  and  unpopular  word  *'rates"  from  our  vocabulary. 

What  we  have  really  established  is  a  series  of  standards  of 
coexistent  relations  to  be  used  as  a  basis  for  quantitative  reason- 
ing with  reference  to  the  relations  of  sequence  found  in  class  loss 
waves;  in  other  words,  without  violent  organic  change  in  existing 
methods,  which  are  the  results  of  a  slow  process  of  evolution,  we 
make  the  same  step  forward  that  resulted  from  the  farmer's 
experiment  with  the  fence-rail  as  a  measure  of  weight,  and  thus 
lift  fire-rating  to  the  plane  of  quantitative  measurement,  which  is 
the  aim  of  all  science. 


Relations  Between  National  and  State 
Tariffs  of  Cost  Estimates 

The  preceding  chapters  may  leave  the  reader  in  the  dark  as 
to  the  real  functions  of  and  relations  between  the  national  and 
state  tariffs  suggested.  He  will  naturally  say,  You  construct  a 
general  tariff  as  a  standard  from  which  to  establish  relations 
among  state  tariffs,  which  in  turn  become  the  standards  for 
establishing  relations  among  cost  estimates  in  local  tariffs. 
These  things  are  simply  a  series  of  stratified  assumptions  resting 
upon  indefinite  data  in  the  first  instance.  Why  not  guess  at 
the  rates  at  once,  and  save  all  this  trip  around  Robin  Hood's 
barn? 

In  answer,  it  is  proper  to  reiterate  that  all  reasoning  is  a  com- 
parison of  relations,  and  that  in  the  absence  of  established  fact 
the  reasoning  process  must  start  from  some  fundamental  assump- 
tion as  a  working  hypothesis.  The  national  tariff,  as  this  assump- 
tion, would  be  a  series  of  estimates  of  the  analyzed  parts  of  hazard 
found  in  each  class;  these  estimates  establish  coexistent  relations 
among  the  parts  known  as  charges,  credits,  and  basis  rate,  as 
well  as  of  class  to  class.  This  central  tariff  would  constitute  a 
standard  for  establishing  state  tariffs  bearing  consistent  relations 
with  each  other  through  percentage  modifications  of  the  central 
tariff.  These  state  tariffs  in  turn  would  thus  become  standards 
for  establishing  similar  relations  among  classes  and  individual 
risks  in  the  limited  geographical  areas  known  as  states.  We 
thus  obtain  a  series  of  orderly  coexistent  relations  among  charges, 
credits,  and  basis  rates,  with  reference  to  risks,  classes,  and 
states,  as  an  instrumentality  for  the  construction  of  local  tariffs 
of  estimated  cost  relations,  which  in  turn  are  simply  a  sequence 
of  correlated  effects  known  as  individual  cost  estimates,  produced 
by  a  system  of  correlated  causes  known  as  state  tariffs.  Up 
to  this  point  the  only  end  sought  has  been  to  preserve  logical 

91 


92  Fire-Rating  as  a  Science 

relations  of  coexistence  through  estimate  and  comparison  of  a 
series  of  standards. 

With  these  standards  established,  each  company's  records  at 
the  end  of  the  year  would  show :  * 

1.  The  total  footings  of  the  average  cost  column.  (Standard  for  the 
year.) 

2.  The  total  footings  of  premiums  actually  received  at  rates  charged. 
(Income.) 

3.  Total  losses  and  expenses;  i.  e.,  actual  cost  of  carrying  the  year's 
business.    (Outgo.) 

We  thus  obtain  from  the  footings  of  cost  column  a  standard  for 
the  year  with  which  to  compare  income  and  outgo  ^  a  self -creating 
annual  standard,  derived  from  permanent  local  cost  estimates, 
which  strictly  conforms  to  the  scientific  definition  of  a  standard. 
(See  chapter  on  "Standards.")  This  standard  enables  us  at  the 
end  of  each  year  to  compare  and  establish  true  relations  which 
will  qualify  us  to  determine  intelligently  what  changes  should 
be  made  in  our  selling  prices.  In  other  words,  we  would  for  the 
first  time  possess  reliable  data  from  which  to  take  our  annual 
reckonings  and  modify  our  selling  prices  intelligently  to  meet 
existing  conditions. 

Following  out  this  chain  of  reasoning,  it  is  obvious  that  we 
establish  a  series  of  sequential  relations  through  a  system  of  per- 
manent coexistent  relations  assumed  as  a  standard  of  comparison. 

This  establishment  of  correct  relations  is  the  real  end  of  the 
rating  function,  as  it  is  the  end  of  all  reasoning,  quantitative  or 
qualitative,  inductive  or  deductive.  It  does  not  follow  that  rates 
need  to  be  changed  every  year,  in  every  state,  or  for  every  class. 
It  is  not  necessary  that  each  class  should  show  exactly  the  same 
margin  of  profit  each  year  as  every  other  class.  The  end  sought 
is  to  secure  the  ability  to  regulate  the  relationship  between  cost 
and  selling  price  intelligently.  With  this  relationship  constantly 
ascertainable  through  standards  of  comparison,  we  would  have  a 
latitude  of  discretion  in  modifying  rates  that  we  do  not  enjoy 
with  present  rating  system,  under  which  every  change  in  rates 
destroys  the  reliability  of  our  ratios,   and  creates  appearances 

*This  presupposes  that  daily  reports  will  show  the  cost  of  each  risk  as  given  in  local 
tariff,  as  well  as  the  actual  premium  paid,  and  that  these  two  amounts  will  be  entered  in 
separate  columns  in  the  companies'  registers. 


National  and  State  Tariffs  of  Cost  Estimates         93 

illusive  alike  to  the  public  and  ourselves.  Reasonable  uniform- 
ity is  all  that  can  in  reason  be  expected ;  nor  does  it  follow  that 
changes  should  be  made  on  the  experience  of  single  years.  There 
is  an  underlying  logic  with  relation  to  sequence  as  well  as  coex- 
istence. Classes  composed  of  few  risks  of  large  value  naturally 
have  large  waves  in  loss  ratio.  Cost  estimates  of  such  classes 
should  be  founded  on  an  experience  of  not  less  than  ten  to  fifteen 
years,  and  rate  changes  made  from  the  experience  of  a  term  cor- 
responding with  the  relation  between  the  amount  of  single  fire 
hazard  and  the  total  premiums.  In  other  words,  wide  loss  waves 
would  tend  to  create  long  rate  waves.  It  is  in  the  important 
competitive  classes,  such  as  dwellings  and  mercantile  risks, 
where  rate  modifications  would  become  necessary  most  frequently. 
When  we  have  obtained  the  ability  to  intelligently  control  rate 
waves,  we  will  be  free  to  exercise  intelligence  in  their  control. 


The  Comity  of  Fire  Insurance 

No  analytical  consideration  of  the  rating  problem  can  over- 
look the  relations  of  loss  and  rate  waves  to  time  and  space,  as 
well  as  to  individuals  and  property  groups.  While  theoretically 
classification  recognizes  each  separate  property  class  as  a  distinct 
entity,  and  every  company  keeps  a  ledger  account  of  debits  and 
credits  with  each  class,  precisely  as  a  merchant  keeps  a  ledger 
account  with  each  customer,  in  practice  this  complete  segregation 
cannot  be  rigidly  enforced  without  hardship. 

Fire  insurance  is  based  upon  the  divine  injunction,  "Bear  ye 
one  another's  burdens,"  and  this  implies  a  vast  network  of  comity 
permeating  time,  space,  property  classes,  individuals,  and  commu- 
nities. This  comity  compels  a  modification  of  the  inexorable 
results  of  classified  experience  precisely  as  equity  is  necessary  to 
temper  the  rigors  of  the  law.  In  bearing  each  other's  burdens 
all  owe  a  common  obligation  to  each,  and  each  to  all.  Whether 
we  consider  the  artificial  division  of  space  into  state  areas,  of  time 
into  years,  or  of  property  into  classes,  the  obligation  to  bear  each 
other's  burdens  is  as  strong  and  as  undeniable  as  the  obligation 
of  individual  to  individual,  for  this  obligation  is  the  warp  and  woof 
of  all  insurance.  The  measurement  of  comity  from  this  broad 
point  of  view  is  beyond  exact  human  prevision.  It  lies  in  the 
domain  of  ethics,  and  is  recognized  by  society  and  the  world  in 
every  great  calamity  which  causes  a  destruction  of  property  too 
great  to  be  borne  by  limited  communities.  Under  existing  condi- 
tions it  has  been  impossible  to  establish  any  canons  for  the  reason- 
able control  of  these  vast  ethical  obligations  in  fire  insurance,  but 
in  the  light  of  the  theory  that  fire-rating  has  for  its  end  the  intel- 
ligent control  of  a  rate  wave  ancillary  to  the  wave  of  cost,  the 
possibility  of  an  equitable  control  of  these  broad  interrelations, 
in  which  individual  rights  are  subordinate  to  the  rights  of  com- 
munities, becomes  at  once  apparent.  In  considering  this  possi- 
bility, we  must  take  things  as  they  exist  in  their  relations  to  each 

94 


The  Comity  of  Fire  Insurance  95 

other,  for  in  this,  as  in  everything  else  in  the  problem  of  fire- 
rating,  we  are  dealing  with  relations. 

At  Decatur,  Illinois,  there  are  two  industrial  establishments, 
one  manufacturing  rings  for  hogs'  noses  to  prevent  their  root- 
ing, and  the  other  a  patented  device  to  insure  the  planting  of 
corn  at  regular  intervals,  known  as  the  '* check-rower. "  At 
Niagara  Falls  there  is  an  establishment  for  the  manufacture 
of  carborundum.  Each  of  these  "plants"  is  probably  the  only 
one  of  its  kind  in  the  United  States,  probably  in  the  world. 
The  first  is  a  cold-metal  worker  with  japanning,  the  second 
a  cold-metal  worker  with  dipping,  and  each  similar  in  the 
main  features  of  hazard  to  well-established  groups  of  metal 
workers.  The  third  is  similar  to  the  hazard  of,  say,  a  tile  fac- 
tory. A  comparison  of  the  main  features  of  hazard  in  each  of 
these  risks  with  other  more  common  industries  makes  the  task 
of  consistent  rating  by  analogy  an  easy  one ;  but  each  of  these 
risks  stands  alone — to  place  it  in  a  class  by  itself  would  be  to 
deprive  it  of  the  benefits  of  insurance.  There  are  thousands  of 
similar  unclassed  risks  throughout  the  country  which,  from  the 
standpoint  of  comity,  would  be  outlawed  were  they  not  grouped 
into  a  forced  alliance  as  a  miscellaneous  class,  and  made  to  share 
each  other's  fortunes,  with  relation  to  the  hazard  of  fire.  One 
may  be  rated  at  three  per  cent,  another  at  fifty  cents,  as  analogy 
or  the  analysis  of  hazard  may  determine,  but  this  relation  in 
inherent  hazard  being  established,  it  is  clear  that  a  community 
of  interest  is  better  than  for  each  to  stand  alone,  which  would  be 
tantamount  to  dispensing  with  insurance  altogether. 

Again,  when  we  come  to  risks  numerous  enough  to  group  into 
classes,  we  find  many  groups  composed  of  so  few  risks  as  to  be 
little  nearer  the  law  of  average  than  the  unique  establishments 
above  named.  An  examination  of  the  statistics  made  up  from 
the  combined  experience  of  two  score  companies  shows  that 
nearly  one-half  of  the  classes  important  enough  to  be  grouped  do 
not  yield  in  their  aggregate  premiums  one  per  cent  of  the  total 
premiums  received  from  all  classes. 

It  would  be  far  better  for  all  these  groups,  however  divergent 
their  hazard  and  rates,  to  be  thrown  into  one  miscellaneous  class 
in  which  they  could  share  each  other's  losses,  than  for  each  group 


96  Fire-Rating  as  a  Science 

to  be  compelled  to  pay  its  own  losses,  always  provided  that  their 
rates  were  apportioned  to  show  reasonably  true  relations  to  each 
other  according  to  relative  hazard. 

A  further  analysis  of  the  relative  importance  of  classes,  as 
shown  by  the  premiums  they  yield,  reveals  the  fact  that  some 
classes  yielding  large  premiums  are  composed  of  a  small  number 
of  risks  where  large  values  are  concentrated.  This  applies  to 
breweries,  distilleries,  terminal  elevators,  packing-houses,  flour- 
ing-mills,  wholesale  lumber-yards,  opera-houses,  oatmeal-mills, 
cotton-compresses,  and  many  other  classes.  The  slightest  con- 
sideration of  the  question  would  convince  any  intelligent  mind 
that  the  aggregate  premiums  of  any  one  of  these  classes  in  any 
one  state  would  be  too  small  to  establish  reliable  averages,  or, 
considered  from  another  standpoint,  the  loss  wave  would  be  sub- 
ject to  fluctuations  so  violent  that  it  could  not  be  reduced  to 
endurable  proportions.  State  the  question  to  a  property  owner 
in  any  of  these  classes,  whether  he  would  rather  share  in  the  loss 
ratio  of  his  state  or  in  the  loss  ratio  of  similar  property  through- 
out the  country,  and  it  would  not  take  him  long  to  decide  that  it 
would  be  to  his  advantage  to  share  in  the  national  loss  ratio  of 
his  class. 

On  the  other  hand,  the  numerical  majority  of  classes  consists 
of  numerous  risks  of  comparatively  small  value,  as  dwellings, 
stables,  mercantile  risks,  hotels,  boarding-houses,  churches, 
schools,  public  buildings,  retail  lumber-yards,  saloons,  restau- 
rants, printing-offices,  blacksmith  and  carpenter  shops,  bakeries, 
etc.  Leaving  out  the  liability  of  these  classes  to  sweeping  con- 
flagrations, the  average  value  exposed  to  one  fire  as  compared 
to  total  premiums  of  each  class  is  so  small  that  these  classes  may 
run  along  for  years  with  a  cost  wave  that  does  not  exceed  endur- 
able proportions.  It  is  true  that  the  average  value  of  churches, 
schools,  and  public  buildings  is  relatively  much  larger  than  that 
of  the  other  classes  named,  but  in  view  of  the  fact  that  they  are, 
as  a  rule,  isolated,  and  not  so  liable  to  the  hazard  of  municipal 
conflagrations,  the  relative  amount  exposed  to  one  fire  would  not 
differ  greatly  from  that  of  other  classes.  Bearing  in  mind  the 
facts  stated,  it  will  be  readily  appreciated  why  separate  basis 
tariffs  are  maintained  for  each  state  in  rating  some  classes  while 


The  Comity  of  Fire  Insurance  97 

in  rating  other  classes  state  lines  are  ignored,  and  the  same  tariff 
used  in  many  states.  This  is  particularly  the  case  with  industrials 
connected  with  the  staple  products  of  geographical  sections. 
There  is  ostensibly  but  one  tariff  in  the  Northwest  for  fiouring- 
mills,  elevators,  packing-houses,  and  wholesale  lumber-yards, 
and  in  the  South  for  cotton,  sugar,  tobacco,  and  whisky  risks. 
In  this  fact  we  have  unconsciously  recognized  the  law  of  the 
relation  between  the  average  amount  at  risk  and  total  premiums, 
and  in  this  way  have  established  interstate  comity,  under  which 
risks  of  these  classes  are  made  to  share  in  the  national  loss  ratio 
of  their  class  instead  of  their  state  loss  ratio.  But  when  we  care- 
fully consider  the  classes  ostensibly  rated  on  state  averages,  we 
find  that  on  account  of  their  mutual  exposure,  they  are  about  as 
liable  as  the  other  classes  to  destructive  state  loss  waves,  result- 
ing from  municipal  conflagrations  in  the  minor  cities,  which  would 
make  an  intolerable  addition  to  the  rates  of  any  given  class  or  of  all 
classes,  if  each  state's  rate  wave  were  made  to  follow  its  loss  wave 
without  modification.  No  year  passes  in  which  a  municipal  con- 
flagration does  not  more  than  double  the  loss  ratio  of  some  state. 

These  facts  clearly  establish  the  inference  that  public  welfare 
demands  an  interacting  system  of  comity  which  will  distribute 
the  crests  of  dangerous  annual-cost  waves  so  widely  over  space, 
time,  and  property  values  that  these  waves  will  be  reduced  to 
endurable  proportions.  This  would  require  the  establishment  of 
formulas  determining  what  are  tolerable  additions  to  rate  waves, 
and  this  once  established,  the  excess  of  class  or  state  loss  ratio 
could  be  methodically  spread  as  a  small  but  uniform  addition  to 
the  rates  of  all  property.  Taking  the  classes  where  value  exposed 
to  single  conflagration  is  large  compared  with  the  aggregate  pre- 
miums, the  total  premiums  on  packing-houses,  for  instance,  for  a 
five-year  period,  may  be  a  million  dollars.  One  total  loss  on  a 
packing  establishment  would  double  the  average  rate  for  the  entire 
period.  This  would  be  an  intolerable  expense  for  the  industry; 
and  if  the  companies  should  attempt  to  collect  the  increase  through 
a  rate  advance,  it  would  result  in  the  business  being  lost  to  com- 
petitors who  do  not  pay  any  regard  to  averages  or  experience. 

Let  us  suppose  that  a  twenty-five  per  cent  increase  in  packing- 
house rates  be  tolerable  for  one  year,  or  to  put  it  in  another  way, 


98  Fire-Ratlng  as  a  Science 

that  if  this  increase  were  maintained  longer  than  a  year  it  would 
generate  an  undue  competition  for  the  class.  This  would  leave 
seven  hundred  and  fifty  thousand  dollars  to  distribute  in  the  next 
year's  average  basis  rate  on  all  classes  throughout  the  country, 
which  would  amount  to  about  one-half  of  one  per  cent;  in  other 
words,  a  seventy-five  per  cent  increase  in  packing-house  rates 
would  be  changed  into  a  one-half  of  one  per  cent  increase  in  the 
aggregate  premiums  of  the  country. 

Applying  this  principle  to  state  ratios  as  developed  by  sweep- 
ing municipal  conflagrations  in  the  minor  cities,  we  find  that  if 
the  destruction  of  a  city,  say  in  North  Dakota,  should  give  an 
aggregate  loss  of  three  million  dollars  (equivalent  to  possibly 
three  years'  premiums  of  the  entire  state)  this  would  require  an 
advance  of  three  hundred  per  cent  in  rates  for  the  ensuing  year, 
or  one  hundred  per  cent  for  three  years.  Either  of  these  increases 
in  the  state  rate  wave  would  be  intolerable,  and  would  simply 
give  rate-cutting  competitors  a  chance  to  pick  up  all  the  desir- 
able business  of  the  state,  which  they  would  do,  on  the  theory 
that  lightning  does  not  strike  twice  in  the  same  place.  Let  us 
suppose  the  maximum  endurable  rate  increase  for  one  year  in  any 
one  state  to  be  twenty-five  per  cent.  By  shifting  the  remainder 
of  this  loss  on  the  broad  shoulders  of  all  insurable  property 
of  the  country,  it  would  require  two  million  two  hundred  and 
fifty  thousand  dollars  to  be  added  to  the  national  average  rate, 
or  say  an  advance  of  less  than  one  and  one-half  per  cent  in  the 
next  year's  rates  in  all  states.  In  this  way  a  system  of  interstate 
and  interclass  comity  would  be  established  which  would  appeal 
to  the  common  sense  and  self-interest  of  every  citizen,  because 
the  logic  of  shifting  an  unbearable  burden  from  classes  or  states 
on  the  community  is  as  apparent  as  the  necessity  for  shifting 
a  similar  burden  from  the  individual  to  his  property-class  or  state. 

This  principle  of  comity,  while  not  recognized  by  any  logical 
system  in  fire  insurance,  is  forced  upon  it  by  necessity.  We  have 
made  seemingly  no  attempt  to  analyze  or  keep  track  of  it 
through  any  system  of  interclass  or  interstate  accounting.  When 
a  state  or  class  has  experienced  a  tidal  wave  of  conflagration,  or 
series  of  such  waves,  we  have  either  made  an  unendurable  rate 
advance  and  lost  business  to    the  rate-cutters,  or  dumped  the 


The  Comity  of  Fire  Insurance  99 

excess  into  our  national  average,  and  kept  no  further  track  of  it. 
In  a  year  or  two  it  is  forgotten,  and  tlie  state  or  class  that  under 
any  system  of  suspended  accounts  would  be  the  largest  debtor 
to  our  national  indemnity  fund  becomes  the  most  persistent  in 
nagging  fire  insurance  through  inimical  laws,  and  the  most  per- 
sistent in  demanding  lower  rates. 

Under  scientific  rating,  it  would  be  possible  to  deal  with  phe- 
nomena of  this  kind  intelligently  and  justly  through  state  and 
class  accounts.  Old  balances  would  be  kept  track  of  and  col- 
lected as  fast  as  it  became  possible  without  creating  intolerable 
rate  waves,  or  generating  rate-cutting  competition  in  states  or 
classes.  In  this  way,  true  comity  could  be  maintained  in  lieu 
of  the  no-system  of  the  past,  which  has  at  times  compelled  fire 
insurance  to  rob  Peter  to  pay  Paul,  and  at  other  times  forced  it 
to  submit  to  be  robbed  by  both. 

From  its  concrete  aspect,  fire-rating  establishes  coexistent 
relations  through  estimate;  from  its  abstract  aspect,  its  function 
should  be  to  maintain  sequential  relations  among  classes  and 
states  through  uniform  and  combined  classification^  and  finally  in 
its  broadest  socialistic  aspect,  it  is  its  duty  -to  temper  unbearable 
waves  of  conflagration  to  people's  ability  to  pay,  through  national 
statistics  which  keep  track  of  these  wave  excesses,  and  in  the  end 
exact  compensation  as  far  as  the  beneficiaries  are  able,  restoring 
deferred  payments  to  the  fund  from  which  they  came  in  order 
that  the  community  at  large  may  in  the  end  be  reimbursed  through 
rate  reductions.  This  of  course  can  be  done  only  through 
national  statistics,  and  the  maintenance  of  accounts  with 
states  and  classes.  Probably  fire  insurance  has  not  evolved 
sufficiently  to  even  contemplate  this,  its  ultimate  and  noblest 
function  —  a  function  which  would  command  the  respect  and 
admiration  of  the  world,  and  place  it  in  the  forefront  among 
recognized  modern  activities.  Meanwhile,  no  harm  will  come 
from  pointing  out  this  broadly  humanitarian  task,  which  awaits 
his  industry,  to  the  man  whose  soul  is  engaged  with  nickel  charges 
for  ash-cans  and  sawdust  spittoons,  things  which  could  be  more 
promptly  regulated  by  an  interview  between  the  inspector  and 
owner  than  through  a  tariff  catechism  which  usurps  the  duties  of 
the  janitor  and  chambermaid. 


The  Law  of  Relation  Between  Net  Under- 
writing Profit  and  Class  Cost  Waves. 

In  an  earlier  chapter  it  was  stated  that  the  service  rendered 
by  capital  in  the  transaction  of  fire  insurance  consisted  in  its 
assumption  of  risk^  and  that  this  risk  increased  in  proportion  to 
the  width  of  vibration  found  in  the  cost  wave  of  each  class.  This 
leads  to  the  inference  that  capital  does  not  render  the  same 
amount  of  service  to  each  and  every  property  class,  and  that  it  is 
entitled  to  a  larger  net  underwriting  profit  in  assuming  the  wave- 
risk  found  in  some  classes  than  in  others.  With  our  present 
inflexible  tariff  system,  it  would  be  impossible  to  change  rates 
with  sufficient  promptness  or  precision  to  control  the  net  under- 
writing profit  on  property  classes,  but  the  fact  remains  that  igno- 
rance of  or  at  least  indifference  to  this  logical  law  of  class  profits 
has  contributed  liberally  to  the  destruction  of  morale  in  the 
industry  of  fire  insurance. 

It  should  be  borne  in  mind  that  this  law  has  nothing  to  do 
with  agents'  commissions,  for  a  class  with  a  small  loss  wave  may 
require  more  labor  on  the  part  of  agents  than  a  class  with  a  large 
wave.  The  character  of  the  service  rendered  by  capital  in  assum- 
ing risk  is  entirely  distinct  from  the  service  rendered  by  agents. 
Through  a  general  indifference  to  the  inexorable  logic  of  this 
law,  preferred  classes  have  been  generated,  and  a  traffic  created 
in  these  classes,  as  disastrous  in  its  moral  effect  upon  the  industry 
as  the  liquor  traffic  has  been  in  its  influence  upon  public  morals. 
As  the  liquor  traffic  creates  the  "saloon  influence"  in  politics,  so 
the  traffic  in  preferred  classes  has  created  a  malefic  influence  in 
fire  insurance  that  has  enriched  numerous  corporations  which, 
under  the  pretense  of  transacting  fire  insurance,  have  confined 
themselves  to  the  classes  with  small  loss  waves  and  large  profits.  To 
seek  the  minimum  of  risk  for  the  maximum  of  profit  is  not  in  itself 
culpable,   but  to  accomplish  their  ends  these  pseudo-insurance 


Net  Underwriting  Profit  and  Class  Cost  Waves      loi 

companies  have  systematically  appealed  to  the  selfish  instincts  of 
agents,  and  sought  to  create  prejudice  in  the  public  mind  by  con- 
stant misrepresentation  of  the  companies  really  engaged  in  fire 
insurance.  These  pseudo-companies  owe  their  existence  to  pre- 
ferred classes,  which  are  invariably  classes  with  small  loss  waves.  If 
we  select  the  dwelling  class  as  the  most  important  of  the  pre- 
ferred classes,  we  find  it  to  consist  of  small  detached  risks,  with 
a  loss  wave  which,  in  width  of  vibration  year  after  year,  is  incon- 
sequential. Under  the  law  stated,  the  services  of  capital  in 
assuming  the  risk  of  this  class  have  been,  and  always  will  be,  cor- 
respondingly small,  and  the  wage  of  capital  should  have  been 
constantly  kept  so  low  as  not  to  attract  special  competition  to 
the  class.  Had  the  law  of  maintaining  class  profits  to  corre- 
spond with  width  of  vibration  in  loss  waves  been  systematically 
observed,  there  would  be  no  preferred-class  companies  in  exist- 
ence to-day,  and  the  business  these  companies  have  been  able  to 
secure  by  fouling  the  nest  of  fire  insurance  would  never  have  left 
the  books  of  real  insurance  companies.  It  does  not  follow  that 
rates  on  preferred  classes  might  not  have  been  maintained  high 
enough  to  justify  a  commission  to  agents  adequate  to  the  greater 
service  they  render  in  securing  these  classes,  but  by  maintaining 
the  rates  that  made  these  classes  preferred,  and  not  paying  agents 
for  preferred  services,  the  preferred-class  traffic  was  generated, 
with  its  long  train  of  evils.  The  inconsistency  of  capital  demand- 
ing a  maximum  wage  for  minimum  service,  on  its  own  part,  while 
denying  the  same  principle  as  applicable  to  the  services  of  agents, 
is  the  result  of  ignoring  a  logical  formula  as  simple  as  a  syllogism. 

While  this  inconsistency  was  stubbornly  maintained  year  after 
year  in  the  treatment  of  classes  with  small  waves,  on  the  other 
hand  classes  noted  for  their  tremendous  waves  were  carried  year 
after  year  at  cost  or  less.  Where  insurance  capital  assumed  the 
largest  risk,  and  was  entitled  to  the  largest  wage,  it  has  contented 
itself  with  rendering  its  service  for  nothing,  and  in  many  classes 
has  actually  paid  a  bonus  for  the  privilege  of  rendering  this  ser- 
vice to  large  corporations  and  trusts,  who  have  repaid  the  mis- 
taken generosity  of  fire  insurance  capital  by  systematically 
fomenting  adverse  legislation. 

In  many  of  these  classes  the  wave  of  destruction  is  so  wide 


I02  Fire- Rating  as  a  Science 

that  fire  insurance  capital,  as  a  whole,  assumes  the  risk  of  a  wave 
that  approximates  the  full  value  of  all  property  in  the  class. 
Under  the  law  stated,  these  classes  should  pay  fire  insurance 
capital  in  proportion  to  the  wave  dimensions  assumed,  and  for 
many  of  these  classes  a  net  underwriting  profit  of  fifty  or  even 
one  hundred  per  cent  would  not  be  inadequate,  yet  fire  insurance 
capital  has  rendered  its  service  to  these  classes  as  a  free  gift. 

The  enormous  aggregation  of  value  in  many  individual  risks 
of  these  classes  is  such  that  they  cannot  be  insured  without  ex- 
hausting the  market  of  indemnity,  yet  we  are  regaled  with  the 
spectacle  of  companies  climbing  over  each  other  for  a  line  on  these 
colossal  aggregations  of  values  as  if  there  were  not  enough  to  go 
around,  while  some  broker  representing  a  few  obscure  companies, 
by  simply  bidding  for  the  risk,  is  able  to  cause  an  epidemic  of 
unreason  on  the  part  of  local  agents  willing  to  sacrifice  their 
companies  to  save  their  badly  crippled  commissions. 

Fire  insurance  has  suffered  untold  evils  from  its  ignorance  of 
the  law  that  the  service  rendered  by  capital  is  commensurate  with 
width  of  vibration  in  class  waves.  It  has  nourished  preferred 
class  companies,  sown  the  seeds  of  demoralization  among  its 
agents,  catered  to  powerful  trusts  and  corporations,  who  have 
repaid  it  by  using  their  legislative  lobbies  to  concoct  laws  against 
fire  insurance,  all  of  which  goes  to  prove  that  it  is  not  well  to 
systematically  ignore  a  natural  law. 


The  Relations  of  Fire  Insurance  to 
Chance  and   Probabilities. 

"  We  deal  in  probabilities,  not  certainties,  and  the  laws  of  chance  form 
the  basis  of  our  business." 

Mimoires  of  an  Insurance  Man, 

In  its  popular  sense,  chance  is  defined  as  "a  supposed  agent 
or  mode  of  activity  not  governed  by  law  or  purpose,  also  the 
operation  or  effect  of  such  agent."  To  this  definition  is  added 
the  explanation  that  there  is  no  such  thing  as  chance. 

In  the  light  of  this  definition,  the  preceding  dictum  can 
only  be  construed  as  an  assertion  that  the  laws  of  a  supposed 
something  which  has  neither  laws  nor  existence,  form  the 
basis  of  fire  insurance.  Waiving  this  double-barreled  Hiber- 
nicism,  if  we  again  turn  our  attention  to  the  dictionary,  we  shall 
find  chance  further  defined  as  "an  event  not  calculated  upon." 
In  view  of  the  immense  amount  of  statistical  calculation  in  fire 
insurance,  and  that  in  theory  at  least  its  income  is  adjusted  to 
outgo  upon  this  calculation,  we  must  again  infer  from  the  asser- 
tion of  **an  Insurance  man,"  that  fire  insurance  exists  by  cal- 
culating upon  "events  not  calculated  upon." 

In  its  scientific  sense,  chance  is  further  defined  as  synonomous 
with  probability  and  will  be  considered  in  this  sense  in  connection 
with  that  word. 

Taken  as  a  whole,  the  dictum  of  two  lines  above  quoted,  is  a 
fair  sample  of  the  loose  use  of  words  entering  into  the  unsupported 
assertions  which  form  so  large  a  portion  of  fire  insurance  pol- 
emics. 

It  is  probable  that  in  any  assemblage  of  fire  underwriters 
there  would  be  as  much  difficulty  experienced  in  defining  the 
relations  of  fire  insurance  to  chance  as  in  defining  its  relations  to 
science.  A  true  understanding  of  both  relations  is  of  equal 
importance  to  the  future  of  the  industry,  for  nothing  has  done 

103 


I04  Fire-Rating  as  a  Science 

more  to  place  fire  insurance  in  an  odious  light  before  the  com- 
munity than  the  prevalent  opinion — by  no  means  confined  to  the 
outside  public — that  it  is  a  form  of  gambling. 

If  fire  insurance  is  chance,  it  cannot  be  consistently  classified 
in  the  public  mind  or  dealt  with  by  the  popular  will,  except  along 
with  lotteries  and  other  gambling  devices.  With  this  conception 
of  its  nature,  it  is  idle  to  expect  that  it  will  ever  stand  in  a  more 
favorable  light  with  the  masses  who  make  our  laws. 

As  human  needs  or  desires  constitute  the  store  of  latent  energy 
from  which  every  form  of  industrial  activity  emanates,  it  is  perti- 
nent to  consider  the  respective  motives  which  generate  gambling 
and  insurance.  These  motives  might  be  said  to  lie  at  the  oppo- 
site poles  of  necessity.  A  fundamental  need  of  every  healthy 
mind  is  relief  from  monotony,  for,  like  the  body,  the  mind 
becomes  cramped  from  remaining  too  long  in  one  position. 
Excitement  of  some  kind  is  as  necessary  to  our  mental  Men  ^tre 
as  exercise  to  bodily  health.  Some  minds  are  so  constituted  as 
to  find  relaxation  in  the  pursuit  of  a  hobby,  but  the  masses 
find  relief  from  the  monotony  of  existence  in  divers  ways, 
which,  when  analyzed,  resolve  themselves  into  objective  and 
subjective,  objective,  when  diversion  is  sought  by  witnessing  the 
dramatic  play  of  fortune  with  others,  as  in  novels,  plays,  and  the 
spectacle  of  athletic  contests;  subjective,  when  life  is  intensified 
by  taking  personal  chances  as  in  war,  the  chase,  gambling,  specu- 
lation, or  participation  in  games  of  chance,  skill  or  strength  in 
which  there  is  more  or  less  hazard  of  life,  limb,  or  property.  All 
these  things  are  vents  for  the  gambling  spirit  within  us,  which 
seeks  diversion  by  pitting  victory  against  defeat — they  create 
what  might  be  called  a  form  of  emotional  wave  motion. 

On  the  other  hand,  there  is  neither  excitement  nor  pleasure 
to  be  obtained  from  the  possibility  of  death  or  impoverishment 
by  fire.  There  are  no  alternations  comparable  to  wave  motion 
in  a  settled  dread  of  calamity,  for  the  constant  apprehension  of 
misfortune  constitutes  in  itself  an  unendurable  form  of  monot- 
ony— an  absence  of  healthful  mental  wave  motion,  and  in  this 
monotony  of  apprehension,  we  find  the  motive  which  generates  the 
necessity  for  insurance.  From  this  point  of  view,  it  is  obvious 
that  insurance  and  gambling  as  activities,  are  generated  by  human 


Fire  Insurance  to  Chance  and  Probabilities         105 

needs,  diametrically  different,  and  while  there  may  be  a  resem- 
blance in  method  between  a  gambling  device  and  the  transaction 
of  insurance,  the  resemblance  is  purely  superficial.  The  lottery 
company  itself  takes  no  chance,  but  thrives  from  the  sale  of 
chance  to  others.  The  insurance  company  sells  exemption  from 
chance,  which  it  can  do  with  safety  under  the  law  of  average. 
The  difference  between  the  lottery  ticket-holder  and  the  insurance 
policy-holder  is,  that  the  former  buys  chance  while  the  latter 
purchases  immunity  from  chance. 

With  this  explanation  it  is  proper  to  investigate  the  relations 
of  fire  insurance  to  the  uncertainty  called  chance,  viewing  fire 
destruction  as  a  form  of  wave  motion. 

On  page  40,  the  law  of  the  wave  of  fire  destruction  was  stated 
in  the  following  language: 

"  Waves  of  fire  destruction  tend  toward  reduced  width  of  vibration  in 
proportion  as  hazard  is  segregated  into  smaller  unexposed  values." 

In  this  chapter  it  was  shown  that  the  range  of  the  wave  of 
destruction  lies  between  nothing  and  entire  destruction,  or  (meas- 
ured by  percentage),  between  nothing  and  one  hundred  per  cent  of 
value.  It  was  also  stated  that  the  possibility  of  waves  approach- 
ing the  maximum  was  the  cause  that  created  the  need  for  fire  in- 
surance on  the  part  of  owners.  It  was  further  shown  that  the 
companies  under  the  law  stated  were  able  through  the  device  of 
maximum  lines  to  disperse  and  reduce  hazard  with  relation  to  their 
own  capital,  while  relieving  the  owner  of  all  chance.  With  the 
expansion  in  volume  at  risk  and  dispersion  of  hazard  with  relation 
to  this  volume,  the  wave  of  aggregate  fire  destruction  in  the  United 
States  has  tended  toward  reduced  width  of  vibration,  until  (as  will 
be  shown  by  diagrams  in  succeeding  chapters)  the  wave  fluctu- 
ation has  settled  down  within  a  range  of  ten  to  fifteen  points 
above  and  below  the  mean  line  or  national  average  rate  of  one 
dollar  per  hundred.  This  is  certainly  a  long  step  in  eliminating 
chance,  when  we  reflect  that  for  long  periods  of  time,  insurance 
capital  as  a  whole  has  modified  a  destructive  tidal  wave  of  ten 
thousand  points  as  regards  the  owner  into  a  duck-pond  ripple  of 
twenty-five  points  as  regards  itself.  In  doing  this,  it  may  be 
said   that   fire  insurance   has   obliterated  chance  so  far  as  the 


io6  Fire-Rating  as  a  Science 

owner  is  concerned,  and,  so  far  as  itself  is  concerned,  has  re- 
duced it  to  a  point  where  it  ceases  to  be  chance.  In  other  words, 
taking  a  situation  where  uncertainty  was  a  portentous  and  con- 
stant whole,  fire  insurance  has  with  a  residuum  of  about  one- 
fortieth  of  one  per  cent,  transmuted  this  uncertainty  into  cer- 
tainty for  all  concerned. 

The  chance,  if  any,  found  in  fire  insurance,  must  be  sought 
in  its  methods  of  measuring  fire  hazard,  for  in  other  respects  it 
is  as  free  from  chance  as  other  callings.  It  has  been  shown  that 
this  measurement  of  hazard  consists  in  the  establishment  and 
maintenance  of  true  relations  of  two  kinds,  and  it  is  proper  to 
consider  these  separately  in  order  to  determine  the  degree  of 
chance,  if  any,  in  each.  Coexistent  relations  are  found  in  the 
factors  which  compose  our  tariff  system  and  in  the  specific  rates 
created  by  the  application  of  tariffs.  Granting  that  the  charges, 
credits,  and  basis  rates,  which  make  up  the  rate  of  every  rated 
risk,  must  to  a  large  extent  be  established  by  estimates  based 
upon  experience ;  granting  that  we  can  never  have  a  more  definite 
basis  of  judgment  than  combined  experience,  the  fact  remains 
that  if  we  leave  out  the  disturbing  effects  of  personal  influences 
as  found  in  competition  and  legislation,  the  element  of  chance 
does  not  appear  to  a  greater  degree  in  the  process  of  measuring 
fire  hazard  than  it  appears  in  every  other  calling. 

It  might  be  added  that  in  respect  to  coexistent  tariff  relations, 
the  factors  of  causation  are  more  logically  correlated  than  in  other 
forms  of  industrial  activity,  because  in  the  process  of  establishing 
these  relations,  analysis  is  carried  further,  and  closer  attention 
paid  to  consistency.  Hazard  is  minutely  dissected  into  its  ele- 
ments and  in  appraising  these  elements  which  are  combined  in 
individual  rates,  we  reach,  under  an  established  law  of  logic,  the 
nearest  possible  approach  to  truth.  This  law,  known  as  the  law 
of  error,  is  stated  by  Gauss  in  the  following  language : 

"Partly  from  experience  and  partly  from  a  priori  considerations,  we 
may  readily  express  the  comparative  probability  of  errors  of  various  magni- 
tude, and  lay  down  certain  conditions  to  which  the  law  will  certainly 
conform. 

"  It  may  be  fairly  assumed  as  a  first  principle  to  guide  us  that  large 
errors  will  be  far  less  frequent  and  probable  than  small  ones.    We  know 


Fire  Insurance  to  Chance  and  Probabilities         107 

that  very  large  errors  are  almost  impossible,  so  that  the  probability  must 
rapidly  decrease  as  the  amount  of  the  error  increases.  The  second  prin- 
ciple is  that  positive  and  negative,  errors  will  be  equally  Probable,  which 
may  certainly  be  assumed  because  we  are  supposed  to  be  devoid  of  any 
knowledge  as  to  the  causes  of  residual  errors."* 

Under  this  law,  it  is  obvious  that  errors  of  judgment  in  estab- 
lishing the  factors  of  the  individual  rate  tend  to  offset  each  other 
and  produce  a  mean  which  lies  closer  to  the  truth  than  any  mere 
de  novo  guess  in  each  individual  rate  as  a  whole. 

It  is  claimed  that  the  merchant  knows  exactly  what  each 
specific  article  of  merchandise  costs  him,  while  fire  insurance  does 
not, — that  it  can  only  know  what  an  aggregate  of  a  thousand  or 
more  risks  cost,  and  that  it  is  pure  chance  as  to  which  of  these  risks 
it  will  have  to  pay  for.  As  this  really  constitutes  the  mythical 
chance  in  which  fire  insurance  is  supposed  to  differ  from  com- 
merce and  manufactures,  and  this  difference  has  done  much  to 
create  the  supposition,  it  seems  proper  for  once  to  inquire  whether 
there  is  more  or  less  of  chance  in  this,  than  is  found  in  othei 
activities.  Depreciation,  as  is  well  known,  plays  an  important 
part  in  every  branch  of  commerce,  and  it  is  especially  in  evidence 
among  retailers.  Every  adjuster  knows  how  important  depreci- 
ation is  among  small  dealers,  and  bargain  counter  sales  and  "bar- 
gain days"  in  large  establishments  show  how  important  it  is  with 
them.  Let  us  suppose  a  clothing  merchant  buys  a  thousand 
coats.  He  knows  that  under  the  laws  of  average  there  is  a 
reasonable  certainty  that  one  or  more  of  these  coats  will  be 
ruined  by  mouse,  moth,  or  other  cause ;  in  other  words,  that  there 
is  a  certain  life-expectancy  even  among  ready-made  coats.  Some 
will  be  damaged  by  the  wear  and  tear  of  handling;  others  will  be 
left  in  stock  by  changing  fashions;  in  fine,  among  these  thousand 
coats  there  is  a  hazard  of  depreciation  less  in  degree,  perhaps,  but 
similar  in  nature  to  the  hazard  of  fire  destruction  which  confronts 
the  company  insuring  one  thousand  risks.  Scientifically  speak- 
ing, it  might  be  said  that  depreciation  is  largely  composed  of  the 
form  of  slow  combustion  known  as  oxydization.  The  company 
does  not  know  which  of  its  risks  will  be  destroyed  or  damaged 
by  fire;  neither  does  the  merchant  know  which  of  his  coats  will 

♦Principles  of  Science,  Jevons. 


io8  Fire-Rating  as  a  Science 

be  consumed  by  the  slow  combustion  of  depreciation  before  he 
can  sell  them,  and  it  is  as  inconsequential  to  the  insurance  com- 
pany as  to  the  retail  clothier  to  know,  for  under  the  law  of  aver- 
age the  insurance  company  covers  its  loss  in  its  average  rate, 
while  the  merchant  covers  his  depreciation  in  the  average  allow- 
ance he  makes  in  marking  the  selling-price  on  his  coats.  Both 
act  on  an  assumption,  warranted  by  experience,  that  there  is  uni- 
formity in  average,  and  under  this  law  of  uniformity  they  can 
afford  to  be  equally  indifferent  to  the  fate  of  the  individual  things 
which  constitute  the  aggregate  in  which  the  average  is  inherent. 
From  the  standpoint  of  chance  the  two  cases  are  strictly  analo- 
gous, yet  the  merchant  is  prone  to  look  upon  the  insurance 
company's  transaction  as  chance,  while  his  transaction  is  business. 

But  there  are  other  things  besides  depreciation  in  which  the 
merchant's  relations  to  chance  are  analogous  to  those  of  the 
insurance  company.  It  is  true  that  he  is  able  to  determine  from 
his  bills  of  purchase  what  each  item  of  merchandise  costs  him  in 
some  distant  city,  perhaps  in  Europe, — but  this  is  only  a  fraction 
of  his  selling-price.  He  must  add  to  each  separate  article  for 
freight,  marine  and  fire  insurance,  rent,  clerk  hire,  taxes,  adver- 
tising, depreciation,  profits,  etc.,  an  amount  often  exceeding 
original  cost.  In  making  this  addition  it  is  impossible  for  him 
to  enter  into  a  mathematical  calculation  to  find  just  what  ratio 
of  invoice  cost  he  should  add  to  each  specific  item  in  establishing 
its  selling-price.  He  meets  the  difficulty  by  adding  a  uniform 
percentage,  established  by  the  faculty  of  estimating,  precisely  as 
the  insurance  company  does  in  its  no-wise-different  problem, 
with  this  difference,  however,  that  his  process  is  the  reverse  of 
logical  according  to  the  law  of  error  as  above  stated,  for  unlike 
fire  insurance,  the  merchant  does  not  resort  to  a  systematic 
analysis  or  synthesis  in  which  one  error  tends  to  offset  another, 
but  to  a  reverse  process  which  precludes  all  probability  of 
approximate  accuracy  in  detail.  He  solves  his  problem  precisely 
as  fire  insurance  would  if  it  should  charge  one  dollar  per  hundred 
for  every  risk  in  the  United  States  regardless  of  specific  hazard 
because  the  average  rate  shown  by  experience  had  been  one  dollar. 

Comparison  shows  that  in  its  coexistent  relations  the  element 
of  chance  enters  into  fire  insurance  to  a  smaller  extent  than  it 


Fire  Insurance  to  Chance  and  Probabilities         109 

enters  into  the  affairs  of  every  merchant  in  the  land.  The  fire 
insurance  company  fixes  its  prices  by  an  organized  system  of 
coexistent  relations  far  from  perfect,  it  is  true,  but  still  far  more 
perfect  than  the  system  of  merchants,  manufacturers,  or  railways. 
Average  has  nothing  to  do  with  individuals  or  specific  events. 
The  greengrocer  buys  a  box  of  eggs,  or  a  crate  of  cabbage,  in 
which  breakage  and  decay  are  inherent,  and  it  is  as  inconsequen- 
tial to  the  insurance  company  which  of  the  risks  it  insures 
will  go  to  the  ash  heap  as  it  is  to  the  greengrocer  to  know 
which  identical  eggs  and  cabbage-heads  will  go  to  the  garbage 
heap. 

It  must  be  admitted  that  a  company  insuring  a  thousand  risks 
may  have  an  experience  very  different  from  another  company 
insuring  another  thousand  of  the  same  hazard-group,  even  though 
both  companies  write  at  the  same  tariff  rates.  In  periods  as  short 
as  a  year,  this  difference  may  be  due  to  the  latitude  found  in  all 
averages,  which  increases  the  nearer  we  approach  the  individual 
instance,  but  in  any  period  long  enough  for  the  law  of  average  to 
take  effect,  no  practical  underwriter  would  question  that  the 
difference  in  the  experience  of  the  two  companies  was  occasioned 
by  the  exercise  of  discrimination  in  the  selection  of  risks.  The 
characteristics  of  desirability  and  undesirability  in  individual 
risks  are  as  unmistakable  to  the  skillful  underwriter  as  similar 
characteristics  to  the  buyer  of  live  stock,  and  the  skill  in  selec- 
tion which  makes  one  company  prosper  while  another  meets  dis- 
aster is  no  more  chance  than  is  the  quality  of  discernment  which 
enables  the  successful  doctor  or  lawyer  to  correctly  diagnose  a 
case,  or  the  successful  merchant  to  select  goods  which  will  meet 
or  create  public  demand.  The  ability  to  wisely  discriminate  in 
the  selection  of  individual  risks,  is  not  chance.  It  is  judgment, 
without  which  failure  is  inevitable  in  any  walk  of  life. 

The  worthy  gentleman  whose  memoirs  assert  that  his  business 
is  based  upon  the  laws  of  chance,  would  have  been  nearer  the 
truth  had  he  stated  that  it  has  accomplished  more,  perhaps,  than 
any  other  human  instrumentality  in  eliminating  chance  from 
human  affairs.  He  was  no  nearer  the  truth  when  he  stated  that 
fire  insurance  deals  in  probabilities.  The  subject  of  probabilities 
is  a  large  one.     Quoting  from  a  prominent  modern  writer: 


no  Fire-Rating  as  a  Science 

*'  It  has  perhaps  given  rise  to  more  profound  investigation,  to  a  greater 
variety  of  opinion,  and  in  consequence  to  a  more  extensive  history  and 
literature  than  any  other  single  problem  within  the  range  of  mathematics." 

Fortunately,  fire  insurance  has  nothing  to  do  with  probabili- 
ties. The  relations  between  the  two  are  stated  by  the  same 
writer  in  the  following  language : 

"  The  practice  of  insurance  does  not,  I  think,  give  rise  to  many  ques- 
tions of  theoretic  interest  and  need  not  therefore  detain  us  longer 

As  an  illustration  of  this  we  need  merely  refer  to  the  works  of  De  Morgan, 
a  professional  actuary  as  well  as  a  writer  on  the  theory  of  probability,  who 
has  found  little  or  no  opportunity  to  aid  his  speculative  treatment  of  proba- 
bility by  examples  drawn  from  that  class  of  considerations."  * 

If  we  now  turn  our  attention  to  the  sequential  relations  found 
in  the  changing  of  rates  to  conform  to  experience,  we  find  that 
all  sequential  relations  have  to  do  with  time,  and  as  to  future 
time,  we  have  the  alternative  of  embarking  upon  the  shoreless  sea 
of  probability  or  hugging  the  shore  line  of  the  past.  Fire  insur- 
ance judgment  has  shown  its  wisdom  by  adopting  the  latter  alter- 
native. Except  in  the  beginning  of  each  class  when  its  hazard, 
for  lack  of  experience,  must  be  established  by  pure  surmise,  it 
may  be  said  that  no  class-  rate  was  ever  advanced  or  reduced  in 
the  history  of  fire  insurance,  except  as  a  result  of  experience,  or 
as  dictated  by  expediency  in  meeting  competition. 

The  leading  underwriters'  associations  of  the  country  during 
the  past  year,  appointed  committees  to  investigate  unprofitable 
classes  and  determine  what  should  be  done  with  them.  These 
committees  submitted  long  lists  of  unprofitable  classes  with  the 
recommendation  that  each  should  be  advanced  in  proportion  as 
it  had  been  unprofitable  in  the  past.  In  doing  this,  they  simply 
followed  precedent.  Facts  like  these  show,  whether  we  are  ready 
to  admit  it  or  not,  that  in  actual  usage  fire  insurance  is  not  con- 
cerned with  probabilities. 

Our  sequential  relations,  which  we  have  never  recognized  as 
distinct  and  separate  from  coexistent  relations,  are  invariably 
established  by  taking  the  past  as  our  yard-stick  to  estimate  the 
future,  though  we  are  frequently  in  doubt  as  to  whether  it  is  a 
yard-stick  or  a  "two-foot  rule." 

♦Logic  of  Chance,  J.  Venn. 


Fire  Insurance  to  Chance  and  Probabilities         in 

In  the  evolution  of  fire  insurance  there  is  a  growing  recog- 
nition of  the  fact  that  rating  must  be  a  science,  not  of  prevision, 
but  of  revision,  a  science  of  adjustment  of  logical  and  permanent 
coexistent  relations,  to  be  used  as  an  unvarying  standard  in 
adjusting  the  sequential  relations  of  the  past  to  the  future,  a 
science  of  the  correct  exchange  of  balances  between  stockholders 
and  policy- holders,  having  in  view  the  relations  of  time  and  space. 
The  one  thing  necessary  to  accomplish  this  promptly  and  scien- 
tifically, after  coexistent  relations  have  been  so  established  that 
we  will  know  whether  we  are  measuring  with  a  yard-stick  or  a 
two-foot  rule,  is  the  flexibility  in  system  which  will  enable  us  to 
control  these  sequential  relations  promptly  and  logically. 

The  element  of  chance  found  in  fire  insurance  comes  not  from 
the  law  of  the  wave  of  fire  destruction,  but  from  deviation  from 
the  principle  enunciated  in  this  law.  The  legitimate  purpose  of 
every  company  is,  while  adhering  to  this  principle,  to  acquire 
and  maintain  a  sufficient  volume  of  premiums  to  secure  the 
stability  found  in  the  law  of  average,  and  keep  its  expense  ratio 
below  the  safety  line,  a  problem  full  of  difficulties,  but  neverthe- 
less not  a  problem  which  lies  in  the  domain  of  chance  or  proba- 
bilities. 


Metropolitan  Conflagrations 

Great  city  conflagrations,  like  tidal  waves,  cannot  be  foreseen 
or  modified  into  bearable  proportions.  The  only  safety  of  the 
fire  insurance  company  lies  in  confining  its  lines  in  "congested 
areas"  to  dimensions  which  will  not  engulf  it  when  the  catas- 
trophe occurs.  It  is  true  that  the  increment  to  average  cost  from 
this  source  is  measurable  within  reasonable  limits.  The  total 
of  past  conflagrations  in  theory  might  be  distributed  through  a 
long  period  of  years  until  made  good.  Assuming  that  the  Chicago 
and  Boston  fire  losses  equaled  the  entire  premiums  of  the  country 
for  two  years,  if  the  average  underwriting  profits  on  the  business 
were  five  per  cent  per  annum,  this  would  be  equal  to  about  forty 
years'  profit,  or  an  addition  of  five  per  cent  for  forty  years,  or  ten 
per  cent  for  twenty  years,  or  twenty  per  cent  for  ten  years.  If 
we  do  not  take  into  consideration  the  interest  on  the  vast  sums 
disbursed  for  these  tidal  waves  of  fire,  and  these  sums  could  be 
spread  out  in  a  permanent  increase  of  average  rate,  possibly  one 
or  two  per  cent  might  be  adequate  to  cover  our  naked  disburse- 
ments for  loss  in  these  conflagrations,  but  even  this  small  addition 
would  be  more  than  the  margin  of  average  profit  of  all  companies, 
and  any  attempt  to  maintain  this  as  a  permanent  increment  to 
normal  rates,  through  periods  free  from  these  conflagrations, 
would  generate  a  competition  and  demoralize  the  business  beyond 
repair.  In  this  fact  alone  is  found  unanswerable  evidence  against 
the  possibility  of  maintaining  unfluctuating  rates  for  long  periods. 
With  the  ability  to  promptly  change  rates  with  the  swing  of  the 
cost  wave,  the  forays  of  irregular  competition  during  every 
period  of  unusual  profits  would  cease,  because  the  ability  to  so 
change  rates  by  classes  or  sections  would  prevent  sufficiently 
prolonged  periods  of  profit  to  invite  these  forays.  It  is  true,  at 
the  worst,  that  the  great  city  conflagration  is  no  more  destructive 
to  fire  insurance  capital  than  financial  panics  are  to  other  capital. 
These  panics  come  in  cycles,  and  every  ten  or  twelve  years  a 

112 


Metropolitan  Conflagrations  113 

considerable  portion  of  the  commercial  capital  of  the  country  is 
wiped  out  of  existence  by  a  rapid  decline  in  values.  These  panics 
are  even  more  frequent  and  regular  than  the  great  metropolitan 
conflagrations  which  swamp  fire  insurance  capital,  but  the  fire 
insurance  company  is  compelled  to  encounter  both  these  catas- 
trophes, for  financial  panics  are  hardly  less  ruinous  to  fire  insur- 
ance than  to  other  capital.  All  told,  however,  the  great  metro- 
politan conflagration  may  be  classed  among  the  cataclysms  which 
set  at  naught  all  human  prevision,  and  fire  insurance  capital  must 
bear  the  brunt  of  these  calamities  until  that  indefinite  time  when 
the  lion  and  lamb  shall  lie  down  together.  With  flexible  rates, 
however,  it  would  be  possible  after  a  great  city  conflagration  to 
make  intelligent  and  instantaneous  rate-advances  throughout  the 
land,  without  resorting  to  the  wild  slogan  "Double  the  rates," 
as  was  done  after  the  Chicago  fire.  The  companies  that  really 
transact  fire  insurance  might  also  find  in  the  rate  equalization 
which  would  inevitably  result  from  flexible  rates,  an  opportunity 
to  maintain  a  continuous,  if  small,  increment  to  rates  as  an  offset 
to  the  infrequent  but  inevitable  metropolitan  conflagration, 
because  this  flexibility  would  prevent  the  inroads  of  rate-cutting 
competition  which  has  always  been  ready  to  take  advantage  of 
the  rate-advances  which  follow  these  conflagrations. 


The  Personal  Equation 

The  personal  influences  which  constitute  so  large  a  portion  of 
fire  cost  are  an  inseparable  part  of  the  basis  rate,  because  from 
their  nature  they  elude  analysis. 

Without  the  ability  to  estimate  these  influences  quantitatively, 
we  only  know  that  they  are  exerted  from  without  and  within,  and 
that  the  most  important  exterior  influence  emanates  from  state 
legislation,  while  the  chief  internal  influence  is  found  in  compe- 
tition. 

Without  attempting  the  task  of  further  classifying  or  meas- 
uring these  disturbing  factors,  they  cannot  well  be  overlooked 
in  any  attempt  to  discuss  fire-rating  as  a  science,  for  science 
depends  upon  natural  laws,  and  no  science  is  possible  where 
lawless  influences  interfere.  We  are  met,  for  instance,  at  the 
very  threshold  of  any  consideration  of  these  influences  by  the 
fact  that  a  reasonably  uniform  proportion  of  insurance  to 
value  is  necessary  in  establishing  true  rate  relations.  When  a 
state  decrees  that  we  shall  not  have  the  power  to  enforce  these 
relations,  and  selfish  interference  at  every  turn  tends  to  upset  all 
logical  relations  between  insurance  and  value,  scientific  prevision 
is  blindfolded  at  the  outset. 

In  the  matter  of  legislation,  the  increase  in  annual  cost  occa- 
sioned by  inimical  laws  would  be  met  by  standard  tariffs  of  cost 
relations,  for  these  tariffs  would  become  the  instrumentality  for 
promptly  assessing  the  results  of  bad  laws  upon  the  property 
owners  who,  for  selfish  ends,  have  been  most  active  in  securing 
the  enactment  of  these  laws — a  thing  we  are  always  threatening 
to  do  but  never  do,  under  our  present  unwieldy  rating  system. 

On  the  other  hand,  personal  influences  within  our  ranks  con- 
stantly tend  to  disturb  established  relations.  We  can  estimate 
the  average  cost,  upon  which  the  whole  fabric  of  rating  must 
rest,  only  by  estimating  some  percentage  of  average  expense, 
because  cost  is  largely  composed  of  expense,  but  the  larger  share 

114 


The  Personal  Equation  115 

of  this  expense  is  caused  by  commissions,  and  without  the  ability 
to  limit  this  part  of  expense  it  is  impossible  to  start  a  reasoning 
process  on  the  problem  of  scientific  rating,  because  our  funda- 
mental assumption  is  certain  to  be  upset  by  the  competition  which 
thrives  by  a  systematic  system  of  upsetting  system. 

These  are  embarrassing  factors  which  disturb  the  possibility 
of  accurate  reasoning,  but  they  are  temporary  factors  which  have 
sprung  from  existing  conditions  created  by  the  very  defects  in 
method  which  it  is  the  object  of  this  inquiry  to  reform. 

Anti-coinsurance  laws  are  a  real  wrong  to  the  small  insurers 
of  the  country,  in  the  fact  that  they  actually  discriminate  in  favor 
of  the  great  corporations  and  trusts  at  the  expense  of  small  prop- 
erty-owners, and  there  can  hardly  be  room  to  doubt  that  anti- 
coinsurance  legislation  will  be  expunged  from  the  statute  books 
when  we  make  a  united  effort  to  educate  legislators  into  a  reali- 
zation of  the  fact  that  anti-coinsurance  laws  are  anti-populistic 
laws.  With  the  facts  properly  understood,  the  instincts  of  the 
great  American  demagogue  may  be  trusted  to  enthusiastically 
espouse  a  cause  so  prolific  of  effective  populistic  argument.  But 
even  admitting  the  impossibility  of  securing  the  repeal  of  these 
laws,  flexible  rates  would  give  us  the  ability  to  include  the 
increased  loss  ratio  in  the  rates  of  the  states  on  whose  statute 
books  they  appear. 

Again,  the  causes  that  have  generated  high  commissions  have 
always  existed  in  the  antecedent,  inflexible  rates  and  its  conse- 
quent, preferred  classes,  coupled  with  the  fact  that  we  have 
loaded  our  rates  for  expenses  to  justify  high  commissions.  In  a 
large  portion  of  the  country  it  has  never  been  possible  to  secure 
any  agreement  limiting  commissions,  and  in  no  part  of  the  United 
States  has  it  ever  been  possible  to  induce  more  than  a  respect- 
able majority  of  the  companies  to  agree  as  to  a  maximum  com- 
mission to  agents.  Company  associations  have  tried  every  expe- 
dient to  limit  the  constantly  increasing  expense  ratio  of  the 
country  (occasioned  almost  wholly  by  the  remorseless  growth  of 
commissions  and  brokerage),  except  the  simple  expedient  of  load- 
ing loss  ratio  with  a  reasonable  addition  for  expense  and  estab- 
lishing cost  estimates  on  this  basis,  leaving  to  the  discretion  of 
the  individual  companies  how  they  shall  dispose  of  this  allowance 


1 16  Fire-Rating  as  a  Science 

for  expense.  If  our  loss  ratio  is  loaded  but  thirty-five  per  cent 
for  expense,  no  company  can  long  exceed  this  expense  with- 
out trenching  upon  its  capital,  and  no  pledge  or  commission 
agreement  or  mandatory  rule  would  be  necessary  to  hold  it  to 
this  maximum  expense,  with  the  equalized  rates  which  would 
result  from  flexible  rates. 

When  we  are  able  in  a  day  to  change  our  rates  in  a  town,  city, 
or  state,  on  a  given  class,  or  all  classes,  by  a  simple  rate  announce- 
ment; in  other  words,  when  we  can  control  our  selling  prices  as 
promptly  as  other  industries,  high  commissions  will  die  an  early 
and  natural  death.  Again,  flexible  rates  mean  rates  always  well 
in  hand.  The  absurd  necessity  of  suspending  rates  which  has 
invariably  resulted  in  the  companies  giving  away  their  policies 
for  long  terms,  and  ruining  their  own  agents,  would  cease  under 
flexible  rates,  because  they  would  enable  the  companies  using 
them  to  instantly  make  such  reasonable  rate  modifications  as 
would  remove  the  temptation  to  cut  rates.  Under  this  prompt 
and  effective  expedient  the  prevalent  tendency  to  rate-cutting 
would  die  out  just  as  piracy  has  ceased  on  the  high  seas. 

In  the  past,  systematic  rate-modifications  have  been  impos- 
sible, and  we  have  been  compelled  to  resort  to  the  brutal  expe- 
dient of  suspended  rates,  which  not  only  crushed  our  agents  but 
ruined  our  established  tariffs,  for  after  a  rate  war  it  has  never 
been  possible  to  restore  the  old  tariff  in  its  entirety. 

Under  a  flexible  rating  system  no  amount  of  percentage  rate 
concessions  would  have  any  effect  upon  the  established  coexistent 
relations  appearing  in  tariffs.  However  wide  or  frequent  the 
rate  fluctuations  might  be,  they  would  not  disturb  these  as  the 
permanent  landmark  showing  what  the  rate  ought  to  be.  It  is  a 
well-known  fact  that  the  tariff  rates  of  thousands  of  important 
risks  have  been  so  frequently  juggled  that  all  accurate  notion  of 
their  true  hazard  relations  has  been  destroyed  in  the  minds  of 
underwriters.  Under  permanent  tariffs  of  cost  relations  the  esti- 
mates of  such  risks  would  stand  through  periods  of  demoraliza- 
tion as  a  constant  reminder  of  their  true  hazard  relations  to  other 
risks. 

If  a  given  number  of  companies  should  furnish  their  statis- 
tical experience  for  the  purpose  of  establishing  data  of  this  kind, 


The  Personal  Equation  117 

this  data  would  be  their  own  property  with  a  tangible  and  increas- 
ing value;  property  that  other  companies  would  have  no  moral 
right  to  confiscate  or  share  in  by  the  farce  of  coming  into  the 
same  agencies,  and  appropriating  in  whole  or  in  part  the  services 
of  the  same  agents.  The  companies  furnishing  the  data  would 
have  the  unquestionable  right  to  refuse  access  to  their  statistical 
property  to  outsiders,  hence  the  separation  of  associated  and 
non-associated  companies,  or  more  properly,  perhaps,  statistical 
and  non-statistical  companies  would  follow  as  a  logical  necessity, 
a  necessity  that  would  appeal  to  the  self-interest  of  agents,  for 
every  intelligent  agent  would  give  the  preference  to  companies 
doing  business  through  flexible  rates  based  upon  permanent 
tariffs  of  coexistent  relations,  because  these  things  would  be 
advantageous  to  his  own  interests. 

With  this  separation  of  companies,  it  would  be  immaterial 
what  commissions  other  companies  might  pay  their  agents,  as  the 
statistics  of  the  contributing  companies  would  not  be  affected. 

Reference  has  been  made  to  the  fact  that  the  statistical  infor- 
mation furnished  by  the  associated  companies  would  have  tan- 
gible and  increasing  value.  This  increasing  value  may  be  judged 
by  the  fact  that  as  the  system  became  established  it  would  be 
suicidal  for  any  company  to  attempt  to  transact  business  without 
the  advantages  of  this  information.  Access  to  these  statistics 
would  eventually  become  as  valuable,  and  membership  as  essen- 
tial, as  in  our  city  stock  boards  and  exchanges.  Membership  in 
these  bodies  has  a  cash  market  value  equal  to  a  moderate  fortune, 
because  men  cannot  transact  business  outside  of  them,  because 
they  represent  the  true  principle  of  healthful  co-operation  which 
in  the  end  inevitably  crushes  out  wasteful  non-co-operation. 


National   Loss  Waves  in  the  Light  of  the 

Diagram 

If  science  is  to  be  regarded  in  the  light  of  its  usual  definition, 
as  a  body  of  organized  knowledge,  and  all  knowledge  is  relative, 
then  fire-rating  as  a  science  is  concerned  with  relations,  and 
relations  only. 

It  has  been  shown  that  our  tariff  system  establishes  coexistent 
relations,  and  that  fire-rating  has  been  floundering  about  in  a 
quagmire  of  confusion  from  its  attempt  to  mold  them  into  sequen- 
tial relations. 

"  The  beginning  of  every  science  may  be  said  to  be  the  date  when  it 
begins  to  assume  a  definite  quantitative  character." 

It  has  been  shown  that  by  adopting  cost  estimates  as  perma- 
nent relations  of  coexistence  in  lieu  of  our  present  tariff  rates  it 
becomes  possible  to  establish  permanent  standards  of  comparison 
by  which  we  can  measure  the  sequential  relations  of  class  and 
state  cost  waves,  and  thus  intelligently  determine  from  past  expe-" 
rience  the  future  price  of  fire  indemnity. 

It  was  further  shown  that  all  exchange  of  intelligence  between 
mind  and  mind  must  be  made  through  symbols  of  some  kind. 
The  natural  symbol  of  sequential  relations  is  the  diagram.  Waves 
of  fire  destruction  and  rate  waves  are  forms  of  motion,  and  as  all 
motion  is  sequential,  these  relations  are  best  shown  through  dia- 
grammatic symbols.  It  is  therefore  proper  to  turn  our  attention 
to  the  diagram  as  an  index  of  both  sequential  and  quantitative 
relations,  and  as  affording  the  comprehensive  view  of  the  data 
necessary  for  deductive  reasoning,  for  these  are  the  ends  sought 
in  every  department  of  scientific  thought,  and  the  practical  utility 
of  every  science  increases  in  proportion  as  we  are  able  to  achieve 
these  ends. 

Let  us  suppose  the  cost,  i.  e.  losses  and  expenses,  of  a  given 
class  to  have  been  for  each  $ioo,  at  risk,  as  follows: 

ii8 


Loss  Waves  in  the  Light  of  the  Diagram  119 

1890-- — - -$0.90 

1891 ___  0.96 

1892 — 1.05 

1893 1.00 

1894 0.85 

1895 „ 0.87 

1896 - 1. 10 

1897 __ 0.92 

1898 0.98 

1899 - --  0-89 

Average -$0.95 

Without  considering  the  question  of  profit,  it  is  plain  that  the 
companies  could  insure  this  class  for  an  average  rate  of  ninety- 
five  cents  and  come  out  even  at  the  end  of  the  ten  years ;  or  on  the 
other  hand,  with  exact  information,  the  rate  each  year  could  be 
based  upon  the  experience  of  the  preceding  year,  and  at  the  end 
of  the  eleventh  year  the  company  would  come  out  even.  This 
would  give  us  the  following  diagram,  the  black  line  indicating  the 
wave  of  annual  cost  and  the  dotted  line  the  ensuing  rate  wave. 

DIAGRAM  No.  i 


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3b 

The  preceding  diagram  shows  the  wave  of  annual  cost  and 
rate  wave  to  be  identical;  the  latter  following  the  first  at  an 
interval  of  a  year.  If  rates  were  made  as  indicated  by  the  dia- 
gram, insurance  would  simply  act  as  a  clearing  house  for  the 


I20  Fire-Rating  as  a  Science 

transfer  of  annual  balances  year  after  year  between  stock-holders 
and  policy-holders.  The  same  result  would  be  accomplished  by 
collecting  an  average  rate  of  ninety-five  cents  throughout  the 
entire  period,  in  which  event  the  transfer  of  balances  would  be 
determined  by  the  fluctuation  of  the  wave  of  cost  above  and  below 
the  average  line,  and  in  this  event  the  transfer  might  be  deferred 
for  many  years.  If  the  cost  wave  were  uniformly  confined  within 
narrow  limits  it  would  entail  no  particular  hardship  on  the  public 
to  have  its  rates  established  each  year  to  follow  the  exact  wave  of 
cost,  but  class  cost  waves  are  subject  to  violent  fluctuations.  On 
the  other  hand,  if  companies  during  the  entire  period  should 
adhere  to  the  average  of  ninety-five  cents,  periods  of  large  profit 
and  large  loss  would  intervene  as  a  source  of  misunderstanding 
between  the  companies  and  policy-holders  who  know  nothing  of 
the  record  of  their  class. 

To  apply  a  concrete  illustration,  let  us  suppose  in  the  city  of 
New  Orleans  a  large  grain  elevator  for  the  storage  and  trans- 
shipment of  grain  to  Europe.  Louisiana  is  not  a  grain-producing 
state,  and  it  is  not  unreasonable  to  assume  that  there  is  not 
another  grain-elevator  in  the  state.  Let  us  again  suppose  this 
elevator  to  have  a  capacity  of  one  million  bushels,  and  to  be 
filled  soon  after  its  completion  with  wheat,  when  a  fire  occurs 
destroying  property  worth  a  million  dollars  on  which  a  premium 
of  ten  thousand  dollars  had  been  collected.  The  elevator  class 
for  the  year  in  Louisiana  would  show  premiums  of  ten  thousand 
dollars  and  losses  of  one  million  dollars;  in  other  words,  the  loss 
would  be  one  hundred  times  the  premiums  for  the  year.  This 
would  leave  the  elevator  class  in  Louisiana  indebted  to  insurance 
nine  hundred  and  ninety  thousand  dollars,  which,  by  the  first 
plan  of  having  the  rate  wave  exactly  follow  the  loss  wave  would 
require  an  advance  of  one  hundred  fold  in  rates ;  in  other  words, 
the  next  year,  the  elevator  people  would  be  compelled  to  pay  to 
the  companies  one  million  dollars  in  premiums,  which  practically 
would  amount  to  the  same  as  the  return  of  the  property  to  the 
insurance  companies.  •  On  the  other  hand,  if  insurance  did  not 
raise  the  rates  one  hundred  fold,  it  would  have  to  charge  the 
assumed  average  rate  of  one  per  cent  for  one  hundred  years,  and 
thus  wait  a  century  to  get  even  on  the  elevator  class  in  Louisiana, 


Loss  Waves  in  the  Light  of  the  Diagram  121 

provided  no  more  elevators  were  built.  But  let  us  suppose  their 
experience  to  have  taught  the  owners  the  impolicy  of  rebuilding 
the  elevator,  there  would  be  no  further  premiums  on  elevators  in 
Louisiana,  and  in  this  event  fire  insurance  would  be  compelled 
to  pocket  the  loss  perrtianently,  whether  it  collected  its  premiums 
under  the  first  plan  or  the  second — in  either  event,  it  is  placed 
in  the  position  of  a  gambler  who  bets  one  million  dollars  against 
ten  thousand  dollars  on  the  mere  happening  of  an  event  isolated 
from  any  possible  connection  with  the  law  of  averages. 

There  are  thousands  of  large  industrial  establishments,  scat- 
tered through  the  several  states,  one,  two,  or  a  dozen,  perhaps, 
to  a  state,  which  bear  the  same  relation  to  averages  as  the  hypo- 
thetical New  Orleans  elevator,  but  elevators  and  grain  storage 
risks  belong  to  a  class  quite  common  in  grain-producing  states ; 
a  class  which  produces  possibly  ten  million  dollars  in  annual 
premiums,  and  the  loss  on  elevators,  if  shared  by  all  the  other 
risks  of  its  class,  would  affect  the  aggregate  cost  of  the  class, 
perhaps,  ten  per  cent,  which  at  most  would  require  a  moderate 
advance  in  rates,  though  in  view  of  the  class  being  ordinarily 
profitable  to  the  companies,  would  probably  require  no  advance 
at  all.  On  the  contrary,  light  losses  elsewhere  might  justify  a 
reduction  in  elevator  rates,  so  that  if  the  New  Orleans  elevator 
were  rebuilt,  its  rate  might  be  reduced  the  next  year  ten  per  cent 
instead  of  being  advanced  one  hundred  fold,  and  the  knowledge 
of  this  fact  might  be  the  cause  of  the  reinstatement  of  the  prop- 
erty and  maintenance  of  an  industry  valuable  to  the  city  and  state. 

This  suppositive  case  proves  the  impracticability  of  observing 
state  ratios  in  all  classes  where  large  values  are  concentrated  in 
one  risk,  and  few  risks  in  a  state ;  or  to  put  it  in  another  way,  it 
clearly  demonstrates  that  the  state  not  only  has  no  concern  in 
the  ratio  of  these  classes,  but  that  from  the  standpoint  of  public 
welfare,  the  best  interests  of  the  community  are  conserved  by 
allowing  people  the  benefit  of  the  interstate  comity  which  common 
sense  shows  to  be  advantageous  not  only  to  both  parties  to  the 
insurance  contract,  but  to  the  local  community  as  well.  Granting 
the  advisability,  even  necessity  to  all  parties  concerned,  of  main- 
taining interstate  comity  with  classes  of  this  kind,  it  is  proper  to 
consider  the  elevator  class  as  a  whole  for  all  states.     Assuming 


122 


Fire-Rating  as  a  Science 


that  after  deducting  expenses  the  annual  premiums  of  grain  stor- 
age risks  in  the  United  States  aggregate  ten  million  dollars  per 
annum,  the  companies  could,  out  of  their  premium  fund,  stand 
an  annual  outlay  of  ten  million  dollars  for  losses  on  the  elevator 
class  and  come  out  even,  or  they  could  stand  a  loss  of  twenty 
half-million-dollar  fires,  or  one  hundred  hundred-thousand-dollar 
fires,  but  fires  do  not  come  in  this  way.  The  universal  law  of 
rhythm  is  nowhere  more  constantly  in  evidence  than  in  fire 
destruction,  and  periodicity  of  maxima  and  minima  is  the  rule 
with  the  elevator  class  as  with  every  other  property  class.  Judg- 
ing from  experience,  it  is  not  unreasonable  to  expect  that  elevator 
fires  will  come  in  waves  in  which  a  depression  lasting  four  or  five 
years  will  be  followed  by  an  epidemic  of  fires,  which  will  send  the 
wave  up  above  mean  cost,  where  it  will  remain  for  a  year  or  two, 
consuming  the  profits  of 'the  minima  years. 

This  would  produce  a  wave  diagram  about  as  follows: 

DIAGRAM  No.  2 


'      ™ 

IOC 

■ 

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V, 

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"^ 

V 

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N 

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105 

IOC 

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32    I8( 

94    i8 

96     IB 

»6     IB 

97     IB 

BB     IB 

99     I9< 

Loss  Waves  in  the  Light  of  the  Diagram  123 

During  the  minima  years,  owners  become  dissatisfied,  claiming 
that  rates  are  too  high.  Competition  sets  in  and  demoralizes 
rates,  and  when  at  last  a  period  of  maxima  years  sets  in,  compe  • 
tition  drops  out  and  the  tariff  companies,  in  the  absence  of  statis- 
tics, forgetting  the  period  of  minima  years,  establish  a  large 
advance  in  rates  about  the  time  another  period  of  minima  years 
is  due.  This  produces  another  period  of  inordinate  profits  and 
of  renewed  dissatisfaction.  Competition  again  forces  down  rates 
about  the  beginning  of  another  maximum  period.  This  whip- 
sawing  process  is  the  history  of  nearly  every  class  important 
enough  to  receive  specific  attention,  but  meanwhile  the  loss  and 
rate  waves  have  been  clashing  against  each  other,  and  the  surface 
of  the  rate  wave,  erratic  as  it  is,  is  churned  into  chop  waves  by 
personal  and  local  influences.  The  owner  of  one  elevator  or  line 
of  elevators,  taking  advantage  of  competition,  succeeds  in  beating 
down  his  rate.  In  certain  sections  competition  develops  a  similar 
influence  affecting  all  elevator  rates  of  a  city  or  state,  under  which 
tariff-rate  relations  are  battered  into  fragments  and  a  just  treat- 
ment of  individual  patrons  and  localities  is  rendered  impossible. 

In  addition  to  these  perturbing  influences  in  the  cost  waves 
of  specific  classes,  we  find  similar  and  even  more  widespread 
influences  in  climatic,  social,  and  economic  conditions  which 
affect  not  only  property  classes  but  entire  state  areas,  producing 
a  permanently  higher  average  in  cost  in  some  states  than  in 
others.  Climatic  influences  for  instance  produce  a  higher  cost 
on  creameries  in  Kansas  and  Missouri  than  in  Illinois,  Iowa,  and 
Wisconsin.  Glass  works  are  not  undesirable  risks  in  Indiana, 
while  very  undesirable  in  Ohio  on  account  of  the  absence  of 
natural  gas  fuel.  It  may  be  stated  as  a  generalization  that  every 
species  of  industrial  life,  like  animal  and  vegetable  life,  has  its 
natural  habitat. 

Again,  existing  conditions  are  such  that  the  average  level  of  the 
cost  wave  as  a  whole  is  permanently  higher  for  all  classes  in  some 
states  or  sections  than  in  others — in  the  Western  states,  it  is  higher 
than  in  the  Eastern,  and  higher  in  the  Southern  than  in  either. 

In  the  past  there  has  been  no  way  of  intelligently  observing 
experience  by  classes,  and  a  "diagrammatic  record  of  class-cost 
waves  by  states  affords  the  means  of  recording  our  condensed 


124 


Fire-Rating  as  a  Science 


experience  in  a  way  to  enable  us  to  maintain  intelligent  relations 
based  upon  actual  statistics,  instead  of  compelling  the  profitable 
sections  and  classes  to  make  good  the  deficit  of  the  unprofitable. 

Comparative  diagrams  afford  a  means  of  portraying  the  con- 
densed history  of  not  only  classes  but  states,  showing  at  a  glance 
their  rate  relations,  and  enabling  us  to  preserve  a  permanent 
record  of  each,  which  will  serve  as  a  constant  reminder  to 
the  public,  as  well  as  the  companies,  of  past  experience.  Our 
reckless  rate  advances  after  a  year  of  heavy  losses  and  equally 
reckless  reductions  after  a  year  of  light  losses,  are  the  results 
of  a  lack  of  definite  knowledge  of  class  and  state  experience, 
for  we  have  no  combined  class  information  and  the  fire  his- 
tory of  the  states  is  buried  in  a  mass  of  tabulated  statistics 
which  no  one  reads  and  which  no  one  could  understand  if  he  did. 
Diagrams  would  enable  us  to  take  a  bird's-eye  view  of  the  past 
and  would  give  at  a  glance  the  suggestions  on  which  we  could, 
with  intelligence,  mold  our  plastic  rates  into  a  modified  form  of 
the  cost  wave  from  data  so  unmistakable  as  to  silence  criticism 
and  repress  the  competition  caused  by  ignorance. 

Taking  the  national  record  as  a  whole,  we  find  the  tabulated 
results  of  all  the  states  for  ten  years,  ending  January  i,  1900,  to 
be  as  follows: 

UNITED  STATES. 


Loss 

Aver- 

Loss 

Year. 

Risks  Written. 

Premiums. 

Losses. 

to 
Prems. 

age 
Rate. 

to 
Risk. 

1890 

$11,231,273,644 

$114,581,079 

$58,998,511 

.52 

1.02 

.0053 

189I 

11,938,730,952 

119.052,005 

71,490,508 

.60 

1. 00 

.0060 

1892 

12,266,950,492 

131,509,416 

75.775.526 

.58 

1.07 

.0062 

I«93 

10,877,725,112 

133.040,054 

85,007,362 

.64 

1.22 

.0078 

1894 

11,192,399,954 

130.189,350 

74,724,377 

.57 

1. 16 

.0067 

1895 

11,539,948,920 

131,735,460 

68,860,402 

•52 

1. 14 

.0060 

1896 

11,807,226,248 

130,577,280 

65,905,495 

•51 

I. II 

.0056 

1897 

12,706,051,099 

134,872,998 

63,026,914 

48 

1.06 

.0050 

1898 

13,384,966,045 

134,571.960 

73.406,773 

•55 

I.OI 

.0055 

1899 

13,731,813.698 

139.759.919 

87,093,286 

.62 

1.02 

.0063 

$120,677,086,164 

$1,299,889,521 

$724,289,154 

.56 

1.08 

.0060 

The  preceding  tabulation  to  the  busy  underwriter  is  simply  a 
mass  of  unsuggestive  figures  to  be  glanced  at  and  consigned  to 
the  waste-basket,  but  for  once  let  us  subject  it  to  the  analytical 
light  of  the  diagram  and  see  what  it  reveals. 


Loss  Waves  in  the  Light  of  the  Diagram  125 

DIAGRAM  No.  3 

Showing  wave  of  loss  to  premiums  for  all  states  for  the  ten- 
year  period  ending  January  i,  1900. 


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DIAGRAM  No.  4 
Showing  wave  of  loss  to  amount  at  risk  for  all  states  for  the 
ten-year  period  ending  January,  1900. 


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126  Fire-Rating  as  a  Science 

DIAGRAM  No.  5 

Showing  wave  of  premiums  to  amount  at  risk  (average  rate) 
for  all  states  for  the  ten-year  period  ending  January  i,  1900. 


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As  every  wave  must  fluctuate  above  and  below  its  mean  line, 
it  follows  that  if  we  superimpose  the  three  waves  shown  by  the 
preceding  diagrams  upon  the  same  average  or  mean  line,  we  shall 
be  able  to  determine  the  sequential  relations  of  each  wave,  not 
only  with  its  own  mean  but  with  each  of  the  other  waves,  and 
with  a  background  ruled  to  scale  measurement,  it  becomes  possible 
to  estimate  these  relations  quantitatively. 

By  thus  placing  the  three  ratio  waves  upon  the  same  mean  line, 
as  shown  by  diagram  6  (page  127),  we  are  able,  for  the  first  time, 
to  obtain  a  bird's-eye  view  of  their  sequential  relations  to  each 
other  for  a  period  of  ten  years. 

The  first  noticeable  fact  is  that  the  three  waves  exhibit  a 
tendency  to  vibrate  in  sympathy  and  that  they  present  a  general 
similarity  of  contour.  In  view  of  what  has  been  said  of  the 
inharmony  between  rate  waves  and  loss  waves,  this  statement 
does  not  seem  to  be  justified  by  diagram  No.  6,  for  the  rate  wave 
moves  up  and  down  with  the  wave  of  loss  to  risk  with  a  harmony 
which  could  not  have  been  anticipated.  It  should  be  remem- 
bered, however,  that  this  diagram  embraces  a  continent  and  a 


Loss  Waves  in  the  Light  of  the  Diagram 
DIAGRAM  No.  6 


127 


Showing  waves  of  loss  to  premiums,  loss  to  amount  at  risk, 
and  premiums  to  amount  at  risk  (average  rate). 

Loss  to  premiums — Dotted  line. 

Loss  to  amount  at  risk ^^--Light  line. 

Premiums  to  amount  at  risk  (average  rate)- Dash  and  dot  line  (heavy). 


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decade.  When  we  turn  our  attention  to  the  state  diagrams  in 
the  next  chapter  an  utter  lack  of  harmony  will  be  noted  between 
the  rate  and  loss  waves.  On  the  contrary,  diagram  No.  6  affords 
a  suggestive  illustration  of  the  rhythmic  manifestation  in  space  and 
time  of  the  all-embracing  law  of  averages.  Out  of  the  seeming 
chaos  of  physical  and  personal  influences  which  have  tangled  our 
ratios  into  an  inexplicable  maze  within  the  limited  fields  of  states 
and  classes,  we  find  emerging  a  synchronous  movement  of  these 
ratio  waves  when  we  are  able  to  look  down  upon  their  movements 
over  a  broad  field  of  time  and  space.  If  it  were  possible  to  look 
down  upon  the  earth  from  the  distance  of  the  moon  it  would 
doubtless  appear  to  be  a  smooth,  silent,  and  motionless  sphere, 
J)ut  to  us  mortals  who  are  down  in  the  "thick  of  things"  it  appears 


128  Fire- Rating  as  a  Science 

anything  but  smooth,  silent,  and  motionless,  and  it  is  our  life 
function  to  deal  with  its  rugosities  and  incessant  changes — we 
cannot  ignore  them.  So  in  fire  insurance  we  are  concerned  with 
the  details  of  states,  localities,  and  classes,  and  these  things  can- 
not be  ignored,  for  it  is  our  duty  to  bring  about  synchronous 
vibration  between  rate  and  loss  waves  in  their  details  rather  than 
in  their  aggregates — our  policy  holders  are  interested  in  these 
details  even  if  our  stock-holders  are  not. 

The  fact  that  the  aggregated  ratio  waves  of  a  continent  oscillate 
with  a  movement  which  at  least  approaches  harmony,  indicates 
that,  if  it  were  possible  to  construct  a  similar  wave  embracing  the 
civilized  world,  they  would  vibrate  in  complete  harmony.  In 
any  event,  diagram  No.  6  is  not  without  interest  in  its  testimony 
that  the  world-wave  of  fire  destruction  in  its  rhythmic  swing  moves 
on  through  the  puny  influences  of  blind  matter  and  purblind 
motive  as  resistless  and  undisturbed  as  the  sweep  of  planetary 
matter  through  space. 

It  will  be  observed  from  diagram  No.  6  that  loss  to  risk  shot 
upward  from  1890  to  1893  inclusive,  when  it  began  an  equally 
sharp  descent  which  continued  to  1897.  In  1891  the  rate  waves 
started  up  after  the  loss  wave  so  rapidly  that  it  caused  the  wave 
of  loss  to  premiums  to  drop  far  below  the  wave  of  loss  to  risk. 
The  maximum  of  the  rate  wave  was  reached  contemporaneously 
with  the  maximum  of  the  wave  of  loss  to  risk  and  it  began  to 
descend  at  the  same  time,  continuing  its  descent  until  1898;  but 
from  1895  to  1897  inclusive,  notwithstanding  its  rapid  descent,  it 
remained  from  six  to  eight  points  above  the  wave  of  loss  to  risk, 
while  still  further  above  loss  to  premiums  for  a  period  of  five 
years. 

The  relative  positions  of  the  three  lines  in  1899  was  almost 
identical  with  their  position  in  1891,  which  year  was  followed  by 
a  sharp  advance  in  both  loss  lines.  The  low  position  of  the  rate 
line  in  1899  made  another  sharp  advance  in 'loss  to  premium,  a 
mathematical  certainty,  and  this  certainty  was  realized  by  the 
experience  of  1900  (not  yet  tabulated). 

There  is  this  difference,  however,  between  present  conditions 
and  those  of  189 1 — we  could  then  readjust  our  rates  without  vio- 
lating the  statutory  law — now  we  cannot.    The  diagram  shows  that 


Loss  Waves  in  the  Light  of  the  Diagram  129 

we  did  readjust  our  rates  in  .1892  and  1893,  with  a  vengeance, 
and  that  we  were  more  successful  in  raising  a  similar  spirit  of 
vengeance  on  the  part  of  the  public  than  we  were  in  maintain- 
ing the  rates  so  established.  Altogether  there  seems  to  be  a 
great  deal  of  really  suggestive  information  in  diagram  No.  6,  in 
which,  for  the  first  time,  we  are  able  to  intelligibly  observe 
sequential  relations  among  our  ratios,  but  this  information 
becomes  more  clear  in  the  light  of  State  experience  shown  by 
similar  diagrams  in  the  next  chapter. 


State  Loss  Waves  in  the  Light  of  the 
Diagram 

The  following  ratio-diagrams  include  twenty-two  of  the  most 
prominent  states,  embracing  a  period  of  thirteen  years  ending 
January  i,  1900. 

In  the  cross  ruling,  the  vertical  lines  indicate  years,  as  denoted 
by  the  figures  at  the  bottom  of  each  line.  The  transverse  lines 
measure  the  number  of  points  in  the  percentage  rise  and  fall  of 
each  wave  as  denoted  by  the  vertical  column  of  figures  at  the 
left  of  the  page. 

As  every  wave  must  fluctuate  above  and  below  its  mean  or 
average  line,  by  superimposing  the  three  ratios  on  the  same  mean 
line,  the  relations  of  the  three  waves  are  shown  for  each  year 
during  the  entire  period.  Each  diagram  has  been  carefully 
calculated  from  the  tabulated  figures  which  appear  on  the  oppo- 
site page. 

The  same  ratio  is  indicated  by  the  same  line  in  every  dia- 
gram, /.  e. 

Loss  to  amount  at  risk Light  line. 

Loss  to  premiums Light  dotted  line. 

Premiums  to  amount  at  risk  (average  rate) Heavy  dash  and  dot  line. 


131 


132 


Fire-Rating  as  a  Science 


CALIFORNIA 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1888 
1889 
1890 
189I 
1892 

1893 
1894 
1895 
1896 
1897 
1898 
1899 

$327,910,952 
352,321,776 
352,179,723 
368,699,916 
380,059,144 
392,294,125 
388,522,503 
377,813,892 

358,671,159 
336.335,228 

324,254,113 
453,198,140 
382,277,165 

$5,590,354 
6,087,041 
6,158,215 

6,304,814 
6,712,456 
7,030,488 
6,780,454 
6,336,734 
4,703,897 
3.816,537 
4,766,989 
6,660,069 
5,640,766 

$2,101,483 
3,049,030 
2,580,002 

2,755,289 
2,433,942 
2,689,033 
2,667,160 
2,815,670 
2,850,642 
2,651,487 
2,637,678 
3,578,142 
2,935,619 

.38 
.50 
.42 
.44 
.36 
.39 
.39 
.44 
.61 
.70 
.55 

•54 
.52 

1.70 
1.70 

1.75 
I.71 

1.77 

1.79 

\il 

1.31 
1. 14 
1.47 
1.47 
1.48 

.0064 
.0087 
.0073 

.0075 
.0064 
.0069 
.0069 
.0075 
.0080 
.0079 
.0081 
.0079 
.0077 

$4,794,537,836 

$76,588,814 

$35,745,177 

.48 

1.59 

.0075 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

. . ,«^, . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram      133 


DIAGRAM  No.  7 
CALIFORNIA 


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134 


Fire- Rating  as  a  Science 


COLORADO 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

1897 
1898 
1899 

$  48,570,113 
62,024,844 
76,017,600 
91.753.216 

94.429.757 
101,654,117 

95.21 1.931 
85,894.340 
92,299,396 
95,711246 

98,425,131 
100,456,128 
123,085,228 

$    904.196 
1,120,189 
1,324.261 
I.551.059 
1,569,749 
1.723.563 
1.555.363 
1,422,026 
1,485.570 
1.557.627 
1.524.733 
1,541.613 
1.705.295 

$  380,246 
398,979 
571.425 
519.549 
572,263 
827,062 
928,500 
793.805 
519,548 

I.155.580 
374.855 
547.936 

1.072,669 

.42 
•36 
.43 

.48 
.60 
.56 
•35 
.74 
.21 

•36 
.63 

1.86 
I.81 
1.74 
1.69 

1.66 
1.70 
1.63 
1.66 
1.61 
1.63 
1-55 
1.53 
1-39 

.0078 
.0064 

.0075 
.0057 
.0061 
.0081 
.0098 
.0092 
.0056 
.0121 
.0038 
.0055 
.0087 

$1,165,533,047 

$18,985,244 

$8,662,417 

46 

1.63 

.0074 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

. . . . . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     135 


DIAGRAM  No.  8 
COLORADO 


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92     18 

93     18 

84     1896     18 

96     1897     18 

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136 


Fire-Rating  as  a  Science 


CONNECTICUT 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 
1895 
1896 

1899 

$167,182,877 
174,445.556 
184,002,882 
201,264,338 
195,234,620 

226,683,733 
230,354.580 
221,828,297 
242,682,930 

265,956.569 
274,180,716 

280,455.909 
284,821,203 

$1,742,677 

1,771.757 
1,792,085 
1,849,569 

1.839. 174 
2,055,054 
2,141,835 
2,171.851 

2,314,763 
2,426,387 

2.443.855 
2,432,546 
2,513.795 

$    858,496 
837.566 

754.495 

812,560 

705,628 

1,140,298 

1,014,102 

927.191 

1.043.331 

1,180,625 

920,096 

1,070,699 

1,178,464 

.60 

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$2,949,094,210 

$27,495,348 

$12,443,551 

•45 

•93 

.0043 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

_._..i_.^.._ ._  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     137 


DIAGRAM  No.  9 
CONNECTICUT 


15 

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94     18 

96     18 

96     18 

97     18 

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138 


Fire-Rating  as  a  Science 


GEORGIA 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
.  Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

1896 

1897 
1898 

1899 

$115,292,842 
117,711,285 
124,688,557 
137,845.257 
155.557,458 
156,289,615 
155,425,140 

138,769.873 
142,789,146 
146,150,040 
150,157,897 
157,983.654 
177,137,318 

$1,456,318 
1,444,492 
1,544,162 

1,760,647 
1,960,730 
2,035,894 
2,044,381 
1,905,826 
2,000,476 
2,033,956 
2,125,228 
2,136,639 
2,349.841 

$    726,271 

693.137 

1,056,457 

949.519 

1,156,905 

1,319,812 

946,850 

987.775 
1,281,165 
1,297,416 
1,037.301 
1,436,387 
1,278,294 

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fs 
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.0060 
.0085 
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.0074 
.0084 
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.0090 
.0089 
.0069 
.0091 
.0072 

$1,875,798,082 

$24,798,590 

$14,167,289 

.57 

1.32 

.0076 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

_._..._.^_.._._  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     139 


DIAGRAM  No.  10 
GEORGIA 


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1887     1888     1889     1890     1891      1892     1893     1894     1896     1898     1897     1898     1899 


140 


Fire-Rating  as  a  Science 


ILLINOIS 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

1899 

$    806,454,052 

813,114,963 

859.338.805 
1,005,062,959 

913,652,560 
1.017,559,758 
1,000,857,380 

946,661,803 

973.295.739 

973,164,456 

1,047,053.087 

1,046,822,043 

1,141,060,852 

$  8,694,951 
9,090,435 
9,529,452 
10,840,621 
10,383,901 
11,893,952 
11,916,597 
11,805,170 
12,046,275 
11,987,846 
12,270,817 
11,927,507 
12,709,739 

$4,913,741 
3,791,156 

4,461,360 
5,116,232 
4,038,214 
6,571,080 

6,907.974 
6,003,583 
6,141,814 
5,909.299 
8,026,369 
8,316,189 

•57 
.42 
.46 
.41 
.49 
•34 
•55 
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•50 

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.65 

1.08 
1. 12 
I. II 
1.08 
1. 14 
1. 17 
I.I9 
1.25 
1.24 
1.23 
I.17 
1. 14 
I. II 

.0061 
.0047 
.0050 

.0044 
.0056 
.0040 
.0066 
.0073 
.0062 
.0063 
.0056 
.0077 
.0073 

$12,544,098,457 

$145,097,263 

$74,534,571 

.51 

I.16 

.0059 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

__,«^, ._. ._  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     141 


DIAGRAM  No.  11 
ILLINOIS 




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142 


Fire-Rating  as  a  Science 


IOWA 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

z 
z 

1899 

$190,954,696 
191,581,258 
202,364,570 
216,476,095 
220,870,002 
242,137,418 
241,834,384 
232,011,959 
213,502,862 
214,064,986 
228,247,254 
242,591,231 
280,071,272 

$2,841,596 
2.936,703 
3,111,801 

3,475,911 
3,404,762 

3,703,513 
3,818,708 

3,867,475 
3,576,803 

3,456.855 
3.461,576 
3,584.937 
4,180,790 

$1,408,441 

943,827 

1,478,040 

1,570,675 
1,634,563 
1,575,681 
2,118,857 

2.235.598 
1,621,962 
1,591,184 

1,340,157 
1,484,080 
1,965,221 

.50 
.32 
.47 

•45 
.48 

•43 

•I 

•45 
.46 

.39 
.41 
.47 

1.49 
1-53 

1.54 
1.58 

1161 
1.52 
1.48 
1.49 

•0073 
.0049 
.0073 
.0073 
.0074 
.0065 
.0088 
.0096 
.0076 
.0074 
.0059 
.0061 
.0070 

$2,916,707,987 

$45,421,430 

$20,968,286 

.46 

1.56 

.0072 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

__, . . . , indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     143 


DIAGRAM  No.  12 
IOWA 


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144 


Fire- Rating  as  a  Science 


KANSAS 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

;i^ 

1897 
1898 
1899 

$131,148,505 
129,945.032 
134.585.640 
135.503.370 
131,054,976 
142,146,123 

138,041,771 
140,109,802 
128,902,971 
128,026,786 
142,217,570 
147,481,944 
183,444.721 

$1,926,252 
1,826,310 
1,848,429 
1,803,799 
1,771,788 
2,028,185 
1,929,936 
1,961,450 
1,744,693 
1,712,336 
1,745.981 
1,771,862 

1.945.797 

$1,209,091 
1,030,930 

I.053.187 
1,007,775 

793.669 

1,011,487 

943.576 

1,070,572 

1,171,672 

958,629 

636,330 

762,197 

1,170,751 

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•50 
.49 

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1.47 
I.41 
1.37 

1-33 
1-35 
1.43 
1.40 
1.40 
1-35 
1-34 
1.23 
1.20 
1.06 

0092 
0079 
0078 

0074 
0061 
0071 
0068 
0076 
0091 
0075 
0045 
0052 
0064 

$1,812,609,211 

$24,016,818 

$12,819,866 

•53 

1-33 

0071 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

_...... ._.._._  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram      145 


DIAGRAM  No.  13 

KANSAS 


20 

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146 


Fire-Rating  as  a  Science 


KENTUCKY 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
Ra^e. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

z 

1897 
1898 

1899 

$161,271,533 
164,039,504 
176,854,086 
200,918,013 
201,890,152 
229,726,283 
206,910,552 

187,397.787 
182,870,044 
183,728,026 
194,964,327 
184,305.328 
201,319,734 

$1,972,319 
2,034,097 
2,240,779 
2,489,122 

2,455»307 
3.001,735 
2,764,246 
2.605,337 
2,651,147 
2.573.834 

2i6o8]o85 
2,762,480 

$1,613,306 
981,070 
1,820,966 
1,875,906 
1,806,510 
I.804.721 
2,340,787 
1.434.727 
1.531,757 
1.898,295 
1,166,298 
1,712,571 
1. 793.9 19 

.82 

.49 
.81 

.75 
.74 
.60 

•85 

•55 
.58 

•74 

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1.22 
1.24 

1.27 

1.23 
I.2I 

I-3I 
1.34 
1-39 
145 
1.40 

1.37 
1.41 
1-37 

.0100 
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.0103 
.0093 
.0091 
.0079 
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.0077 
.0084 
.0103 
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.0089 

$2,476,195,369 

$32,834,141 

$21,780,833 

.66 

1.33 

.0088 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

«^. . . . . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     147 


DIAGRAM  No.  14 

KENTUCKY 


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1887     1888     1880     1890     1881      1892     1893     1894     1896     1896     1887     1898     1898 


hs 


Fire-Rating  as  a  Science 


MAINE 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 
1893 
1894 

z 

1899 

$  83,241416 
80,701,943 
89,140,620 

95,447,324 

92,841,159 

101,063,423 

103,875,200 

94,894,475 

98,758,548 

106,617,256 

109,006,873 

115,196,313 

125,673.733 

$1,143,901 
1,130,704 
1,198,570 
1,297,300 
1.248,815 
1,381,601 

I.473.319 
1,477,289 
1,516,165 

I.531.259 
1,554,500 
1,588,062 
1,731.087 

$654,054 
539.092 

55941 1 
688,357 
785.822 
917,002 

932.637 
1,023,162 
825,815 
800,961 
576,203 
878,679 
1,048,150 

ii 

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n 
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.69 

.55 
.52 

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1.37 
1.40 

1.34 
1.36 

1.35 
1.37 
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1.54 
1.44 
143 
1.38 
1.38 

.0079 
.0067 
.0063 
.0072 
.0085 
.0091 
.0090 
.0108 
.0084 
.0075 

•0053 
.0076 
.0083 

$1,296458,283 

$18,272,572 

$10,229,345 

.56 

141 

.0079 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

._._._._._..i~.  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     149 


DIAGRAM  No.  15 

MAINE 


25 



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Fire- Rating  as  a  Science 


MARYLAND 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

'\^^X   Loss  to 

1887 

$226,786,346 

$1,427,165 

$1,173,622 

.82 

•63 

0052 

1888 

218,223,721 

1,535-143 

1,440,481 

.93 

.70 

0066 

1889 

235,465,129 

I.665.551 

818.561 

•43 

.71 

003  s 

1890 

225,865,121 

''703,538 

1,098.628 

.64 

•75 

0049 

189I 

211,591,612 

1,568,268 

873,099 
956,298 

.56 

.74 

0041 

1892 

222,927,705 

1,690,010 

•5S 

.76 

0043 

189^ 

217,470,280 

1.750,443 

1,546,829 

.88 

.80 

0071 

1894 

214,414,675 

1,859,261 

954,875 

•51 

.87 

0044 

189s 

206,288,859 

1,841,560 

722,576 

•39 

.89 

00^5 

1896 

201,213,720 

1,763,268 

793,271 

.45 

.88 

0039 

1897 

221,107,128 

1.976,754 

777,929 

■35 

.89 

003s 

1898 

218,436,489 

1,888,716 

1,042,267 

•55 

.86 

0048 

1899 

226,004,649 

1.985,522 

707,750 

•36 

.88 

0031 

$2,845,795,434 

$22,655,199 

$12,906,186 

•57 

.80 

0045 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

. , . . . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     1 5 1 


DIAGRAM  No.  16 
MARYLAND 


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152 


Fire-Rating  as  a  Science 


MASSACHUSETTS 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

'^95 
1896 

1899 

$573,023,604 
627,167,983 
618,513,881 
653.153.647 
648,573.843 
720,240,195 
731,321.894 
687,413,281 
748,641,946 
793,066,762 
876,144,166 

869,245,243 
912,129,097 

$6,205,626 

6,394.645 
6,261,100 
6,610,684 
6,375^850 
7.340,152 
7,713,797 
7,648,298 
7.997.708 
8,260,419 
8,841,923 

8,349.737 
8,547,413 

$2,657,562 
3,781,151 
8,527,354 

3. 1 1 1.373 
3.774.535 
3,779,004 
6,943,023 
4.645.784 
3.347.803 
3.676,543 
3,004,845 
5,044,966 

4.643,153 

.43 

•^? 
1.36 

•47 
.59 
.52 
.90 
.61 
.42 
•45 

•54 

1.08 
1.02 
I.OI 
1. 01 

.98 
1.02 
1.05 
I. II 
1.07 
1.04 
I.OI 

.96 

•94 

.0046 
.0060 
.0138 
.0048 
.0058 

•0053 
.0095 
.0068 
.0045 
.0046 
.0034 
.0058 
.0051 

$9,458,635,542 

$96,547,352 

$56,937,096 

.60 

1.02 

.0062 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

. . , . , indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram      1 53 


DIAGRAM  No.  17 
MASSACHUSETTS 


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154 


Fire-Rating  as  a  Science 


MICHIGAN 


Year. 

Amount  at  Risk, 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 
1895 
1896 
1897 
1898 
1899 

$241,717,833 
250,349,014 
275,290,724 
285,900,676 
279,473,169 
298,767,231 
301,887,793 
283.738,338 
288,477.918 
287,902,997 
303,754,605 
330,603,384 
370,791,030 

S3.395.832 
3.538,045 
3.756,392 
3.981,756 
3.999,826 

4,275.173 
4,470,490 
4,302,988 

4,345.713 
4,254,856 
4.358,068 
4,498,445 
4,498,772 

$1,929,752 

1.677,544 
1,722,590 

2,445.754 
2,478,920 
2.231,883 
2,571,734 
2,422,483 
2,089,652 
2,789,439 

2,115.385 
2,467,546 
2.299.558 

•1 

.46 
.61 
.62 

•1 

.56 
.48 

.66 
.49 
.55 
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1.40 
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1.36 
1.39 
1.43 
1.43 
1.48 
I.51 
1.50 
1.48 

I.2I 

.0080 
.0067 
.0063 
.0086 
.0089 
.0075 
.0085 
.0085 
.0072 
.0097 
.0070 

.0075 
.0062 

$3,798,654,712 

$53,676,356 

$29,242,240 

•54 

I.4I 

.0077 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

, , . . . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram      155 


DIAGRAM  No    18 
MICHIGAN 


1 



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156 


Fire-Rating  as  a  Science 


MINNESOTA 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 

$223,062,679 

$3,160,700 

$2,269,072 

.72 

1.42 

.0101 

1888 

222,906,027 

3,244,326 

1,776.256 

.55 

1.46 

.0080 

1889 

240,933,687 

3,349,129 

1.697,747 

•51 

1-39 

.0070 

1890 

262,975,835 

3,084,018 

1.517,771 

.49 

1.17 

.0058 

189I 

239.341,353 

3481,054 

2,276,646 

.65 

1.45 

.0095 

i8q2 

294,899,556 

4,154,328 

2,290,891 

•55 

1.41 

.0078 

1893 

263,846,977 

3,862,249 

3,179.494 

.82 

1.46 

.0121 

1894 

233.942,097 
232,782,685 

3,680,966 

2,457.259 

.67 

1.57 

.0105 

189s 

3.640,519 

1,864,019 

.51 

1.56 

.0080 

180 

243,829,165 

3.717,370 

1,733.368 

.47 

1.52 

.0071 

1897 

251,771.259 

3,499,131 

1,584,703 

.45 

1.39 

.0063 

1898 

277.831,536 

3,590,517 

1,655,650 

.46 

1.29 

.0060 

1899 

309,860,117 

3,908,696 

2,163,642 

.55 

1.26 

.0070 

$3,297,982,973 

$46,373,003 

$26,466,518 

.57 

1.41 

.0081 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

_^_^^________,^^___  indicates  Loss  to  Amount  at  Risk 

«__,_«.«^. .«..««■. indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     157 


DIAGRAM  No.  19 
MINNESOTA 


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158 


Fire-Rating  as  a  Science 


MISSOURI 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

1897 
1898 

1899 

$345,519,997 
357,645,224 
365,027,822 
376,902.754 
376,398,844 
418,077,261 
398,858.869 
348,602,501 
364,577,698 
382,982,600 
381,870,790 
405,978,355 
455,156,845 

$4,158,826 
4,265,044 

4,455,171 
4,501,382 

4.394.697 
5,062,634 

5.017,147 
4,903,494 
4,924,312 
4.769.386 
4,605,889 
4,732,281 
4,768,402 

$3,104,470 

2,437.489 
2.895,381 
2,632,084 

3,251,195 
3.857.776 
4,470,416 
3,464,458 
2,441,923 
2,366,995 
2.639,951 

2,967.755 
2.771.528 

.75 
.57 

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.89 
•71 
.50 
.50 

1 

1.20 
1. 19 
1.22 
1. 19 
1. 17 
I.2I 
1.26 
I.4I 
1.35 
1.25 
I.2I 
I.I7 
1.05 

.0090 
.0068 
.0079 
.0070 
.0086 
.0092 
.0112 
.0099 
.0067 
.0062 
.0069 
.0073 
.0061 

$4,977,599,560 

$60,558,665 

$39,301,421 

.65 

1.22 

.0079 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

_.^.......— .— .i...  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     159 


DIAGRAM  No.  20 
MISSOURI 


1 

y 

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Fire-Rating  as  a  Science 


NEBRASKA 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 

$  89,103,912 

$1,489,132 

$    636,335 

43 

1.67 

.0071 

1888 

104,705,436 

1,735,492 

482,592 

.28 

1.66 

.0046 

1889 

111,603,629 

1,856,507 

852,166 

.46 

1.66 

.0076 

1890 

128,059,204 

1,973.830 

1,060,460 

•54 

1.54 

.0083 

189I 

124,623,830 

1.809,995 

874,731 

.48 

1.45 

.0070 

1892 

137,564,820 

2,109,878 

842,986 

.40 

1-53 

.0061 

I«93 

132,591,141 

1,998,147 

1,288,448 

.65 

I.51 

.0097 

1894 

107,641,249 

1,816,538 

1,126,152 

.62 

1.69 

.0105 

94,469,027 
89,740,440 

1,524,576 

947,386 

.62 

I.61 

.0100 

1896 

1,377,686 

611,712 

.44 

1.54 

.0068 

1897 

98,103,685 

1,378,589 

438,905 

.32 

I.4I 

.0045 

1898 

106,583,277 

1,407,416 

616,351 

.44 

1.32 

.0058 

1899 

121,390,473 

1,490,067 

734,487 

.49 

1.23 

.0061 

$1,446,180,123 

$21,967,853 

$10,512,711 

.48 

1.52 

.0073 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

__,__, , . . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     i6i 


DIAGRAM  No.  21 

NEBRASKA 


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Fire-Rating  as  a  Science 


NEW   JERSEY 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 
1895 
1896 

'^97 
1898 
1899 

$316,313,369 
385,930,288  . 
352,146,777 
384,731,941 
392,431,147 
422,688,761 
435,614,110 
433,453,659 

467,273,355 
479,964,742 
520,577.823 
554,472,830 
565,003.431 

$2,536,478 
2.810,113 
2,754484 
2.896,856 

2,944,715 
3449.835 
3,690,461 
3,735,983 
4,030,764 
4,129,033 
4,365,253 
4,332,731 
4,219,370 

$1,149,991 
1,037,164 
1,395.505 
1,552,731 
1,785.629 
2.452,766 
1,796,498 
1.774,818 
2.079,568 
1.765,321 
1,953.978 
1,902.484 
2,177,167 

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.0034 
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$5,710,602,233 

$45,896,076 

$22,823,620 

.50 

.80 

.0040 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

._..._. . ._  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     1 63 


DIAGRAM  No.  22 
NEW  JERSEY 


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Fire-Rating  as  a  Science 


NEW  YORK 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

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1899 

$3,195,208,683 
3,322,381,343 
3,217,904,667 
3,547.736,160 
3,798,177,149 
3.549.943,155 
3,232,021,194 
3.078,604,705 

3,139,439,171 
3,306,139,822 
3,641,688,074 
3,804,973,604 
3,409,483,536 

$18,646,059 
19,828,143 
18,974,441 
19,689,457 
19,969,024 
21,411,016 
21,994,619 
22,339,420 
22,942,274 
23,444,686 
23,766,292 
19,963,316 
19,197,447 

$14,062,621 
13,611,608 
12,355,411 
11,846,607 
15,204,536 
12,975,186 
14,201,935 
12,835,405 
11,160,953 
10,928,322 
9,900,062 

9,934,447 
17,482,810 

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$44,243,701,263 

$272,166,194 

$166,499,903 

.62 

.62 

.0038 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

__.«_. .^, . . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     165 


DIAGRAM  No.  23 

NEW  YORK 


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Fire-Rating  as  a  Science 


OHIO 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 

$447,054,235 

$5,174,161 

$2,729,971 

•53 

I.16 

.0061 

1888 

460,342,682 

5,261,188 

3,182,116 

.60 

1. 14 

.0069 

1889 

535,225.962 

5,875,000 

3,150,068 

•54 

1. 10 

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1890 

581,942,938 

6.177.959 

3,329,238 

•54 

1.06 

•0057 

189I 

504,639,964 

6,392,011 

4,373,743 

.68 

1.07 

.0074 

1892 

595,372,645 

6,784,237 

4,903.114 

.72 

1. 14 

.0082 

I«93 

598,904,129 

7,004,871 

4,146,939 

.59 

1. 17 

.0069 

1894 

564,925,910 

6,749,335 

4,063,636 

.60 

1. 19 

.0072 

i«9.S 

605,718,102 

7,312,646 

4.835.983 

.65 

I.2I 

.0080 

1896 

584,625,285 

6,849,597 

3,071,691 

•45 

1. 17 

•0053 

1897 

647.526,369 

7,138,509 

3.665,554 

•51 

1. 10 

•0057 

1898 

675,430.664 

7,036,634 

4,240,146 

.60 

1.04 

.0063 

1899 

718,428,503 

7,174,898 

5,766,413 

.80 

1. 00 

.0080 

$7,610,137,388 

$84,931,046 

$51,458,612 

.61 

1. 12 

.0068 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

_. . . . . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     167 


DIAGRAM  No.  24 
OHIO 


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Fire-Rating  as  a  Science 


PENNSYLVANIA 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 
1895 
1896 
1897 
1898 
1899 

$  729,037.662 

766,087,877 

811,767,696 

883.457,672 

881,296,334 

934,832,895 

938,403,423 

886,271,730 

937,276,624 

961,133,999 

1,017,684,501 

1,033,516,858 

1,097,119,021 

$   7.755.078 
8,008,492 
8.333,666 

8,614,399 
9.926,961 
10,029,557 
10,125,807 
9,808,572 
10,265,067 
10,535.570 
11,204,154 
11,360,040 
11,519,276 

$4,157,588 
5.095,289 
4,477,232 
4,716,361 

5.746,927 
6,110,434 
6.057,111 
4.874,744 
5.094.715 

l'¥'556 
6,561,060 
7,074,432 
7,766,127 

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.50 
•51 

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1.05 
1.03 

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1. 10 

1. 10 
1. 10 

1,10 
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.0053 
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.0065 
.0065 
.0055 
.0054 
.0056 

!oo68 
.0071 

$11,877,886,292 

$127,486,639 

$73,077,576 

.57 

1.07 

.0061 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  ta  Amount  at  Risk 

1 . . . ..-.•..-  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     169 


DIAGRAM  No.  25 
PENNSYLVANIA 


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170 


Fire-Rating  as  a  Science 


TENNESSEE 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 

$  91,177,649 

$1,264,480 

$1,300,497 

1-03 

1-39 

.0142 

1888 

106,966,686 

1,490,866 

846,727 

•57 

1-39 

.0079 

1889 

109,647,406 

1,543,273 

691,466 

•45 

I.41 

.0063 

1890 

121,502,336 

1.780.539 

853,620 

.48 

1.46 

.0070 

189I 

125,910,310 

1,855,847 

1,360,249 

•73 

1.47 

.0108 

1892 

129,366,106 

1,970,017 

1,943,659 

.99 

1.52 

.0150 

i«93 

122,186,972 

1,879,793 

1,245.035 

.66 

1.54 

.0102 

1894 

115,880,325 

1,784,281 

1,124,404 

.63 

1.54 

.0097 

1H95 

118,133,723 

1,947,130 

941,932 

.46 

1.65 

.0080 

1896 

124,113,750 

1,964,975 

985,013 

.50 

1.58 

.0079 

'H 

135,541,324 

2,036,228 

1,926,250 

.95 

1.50 

.0142 

1898 

132,068,762 

2,024,408 

1,703,921 

.84 

1-53 

.0121 

1899 

156,448,397 

2,346,475 

2,001,652 

•85 

1.50 

.0128 

$1,588,943,746 

$23,888,312 

$16,924,425 

.71 

1.50 

.0107 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

—........_. ._..-i.  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     171 


DIAGRAM  No.  26 
TENNESSEE 


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Fire-Rating  as  a  Science 


TEXAS 


Year. 

Amount  at  Risk. 

Premmras. 

Losses. 

Loss 

to 

Prems. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
1891 
1892 

1893 
1894 

z 
z 

1899 

$123,136,846 
136,007,009 
146,313,830 
167.634,576 
198,268,974 
210,487,358 
206,596,810 
179,937,487 
198,613,042 
215,976,009 
223,883,452 
263,245,896 
277,853.544 

$2,209,491 
2.342,908 
2.497,474 
3.039.255 
3.352.397 
3.477.506 
3.658.308 
3.217.273 
3.589.867 

3.575.845 
3,606,896 
3,990,856 
4,289,804 

;55i,445.30i 

985,242 

875.756 

1,359.884 

2,580,959 

2.513,245 
2,465,783 
2,332,294 
1,892,879 
2,631,947 
2,092,317 
2,485,617 
2,547,431 

.65 
.42 

.35 
.45 

•77 
•72 
.67 
•73 
•53 
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.62 
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1.79 
1.72 
I.71 
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1.69 
1.65 
1.77 
1.79 
I.81 
1.66 
I.61 
1.52 
1.54 

.0117 
.0072 
.0060 
.0081 
.0130 
.0119 
.0119 
.0130 
.0095 
.0122 
.0093 
.0094 
.0092 

$2,547,954,833 

$42,847,880 

$26,208,655 

.61 

1.68 

.0103 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

. . .._..-. .—.  indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram      173 


DIAGRAM  No.  27 
TEXAS 


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174 


Fire- Rating  as  a  Science 


WISCONSIN 


Year. 

Amount  at  Risk. 

Premiums. 

Losses. 

Loss 

to 
Prams. 

Aver- 
age 
Rate. 

Loss  to 
Risk. 

1887 
1888 
1889 
1890 
189I 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 

$192,081,477 
204,974,184 
211,619,211 
235.491.558 
250,499,473 
279,587,965 
285,731.373 
255,243,795 
276,592,519 
271,402,055 

.288,145,411 
311,624,325 
338,230,869 

$2,903,821 
3,234,481 
3,169,675 
3,372.724 
3,514,517 
4,140,420 
4,429,768 
4,237,866 
4,438,985 
4,255,283 
4,151,300 
4.235.702 
4,506,039 

$1,836,123 

1,784,585 
1,652,574 
1,422,343 
1,517,358 
3,333,970 
3,124,279 
2,750,077 
2,995,474 

1,833.119 
1,540,914 
1,825,009 
2,300,906 

.63 

.55 
.52 
.42 

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•70 

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.37 
.43 
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1.50 

1.43 
1.40 
1.48 

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1.57 
1.44 
1.36 
1-33 

.0096 
.0087 
.0078 
.0060 
.0061 
.0119 
.0109 
.0108 
.0108 
.0068 
.0053 

$3,401,224,215 

$50,590,581 

$27,916,731 

.55 

1.49 

.0082 

Note. — The  waves  created  by  the  ratios  in  the  above  tabulation  are 
shown  in  the  ratio-diagram  on  the  opposite  page,  in  which 

indicates  Loss  to  Premiums 

indicates  Loss  to  Amount  at  Risk 

_...^. .... . indicates  Average  Rate 


State  Loss  Waves  in  the  Light  of  the  Diagram     175 


DIAGRAM  No.  28 
WISCONSIN 


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1887     1888     1880     1800     1801      1802     1803     1804     1806     1806     1807     1808     1800 


176  Fire-Rating  as  a  Science 

The  preceding  diagrams  have  been  constructed  for  the  pur- 
pose of  showing  the  contour  of  the  waves  with  which  fire  insur- 
ance has  to  deal,  rather  than  for  the  purpose  of  making  an 
exhaustive  study  of  the  waves  and  their  mutual  relations,  though 
it  is  proper  to  briefly  point  out  the  utility  of  such  diagrams  as  a 
means  of  deductive  reasoning. 

It  is  obvious  at  first  glance  that  each  diagram  has  a  distinct 
character  of  its  own  as  easily  recognized  and  remembered  as  the 
lineaments  of  an  individual  human  countenance.  It  is  equally 
obvious  that  each  diagram  reveals,  in  a  comprehensive  whole,  the 
sequential  phenomena  of  the  three  ratios  with  which  fire  insurance 
has  to  deal,  showing  relations  among  these  ratios  which  are  hidden 
in  the  nebulous  official  tabulations  from  which  we  have  been 
accustomed  to  seek  in  vain  for  practical  information  in  a  con- 
crete form. 

It  should  be  borne  in  mind  that  the  wave  of  loss  to  premiums 
may  be  considered  identical  with  the  wave  of  cost  {i.  e.,  losses 
plus  expenses)  as  long  as  the  expense  ratio  remains  unchanged, 
for  the  addition  of  any  given  percentage  simply  elevates  the  wave 
without  changing  the  relations  of  its  fluctuations  to  its  own  mean 
line. 

In  every  diagram  the  rate  wave  fluctuates  without  apparent 
relation  to  the  two  loss  waves;  on  the  contrary,  the  two  loss 
waves  not  only  have  the  same  general  contour,  but  in  some  states 
accompany  each  other  so  closely  as  to  be  almost  identical.  In 
other  states,  while  the  contours  of  the  two  waves  are  similar, 
they  spread  widely  apart  some  years,  while  accompanying  each 
other  closely  during  other  years.  Before  inquiring  into  the 
reasons  for  this  it  is  well  to  first  consider  the  wave  of  average 
rate.  This  wave  represents  the  fluctuations  in  the  percentage 
obtained  by  dividing  the  total  amount  at  risk  each  year  into  total 
premiums,  hence  it  is  a  direct  percentage.  For  the  same  reason, 
the  wave  of  loss  to  amount  at  risk  represents  another  direct  per- 
centage, obtained  by  dividing  the  total  amount  at  risk  into  the 
total  losses  of  each  year.  On  the  other  hand,  the  ratio  of  loss 
to  premiums  is  obtained  by  dividing  total  premiums  into  total 
losses;  and  as  premiums  themselves  are  a  percentage,  the  loss 
to   premium   line  represents   a  secondary  percentage — the  ratio 


State  Loss  Waves  in  the  Light  of  the  Diagram      177 

of  a  ratio;  hence,  the  wave  representing  a  direct  percentage  of 
amount  at  risk,  and  the  wave  of  loss  to  premiums  representing 
the  percentage  of  a  percentage  of  the  same  quantity,  necessarily 
run  in  the  same  general  direction,  spreading  apart  in  proportion 
as  the  relations  between  amount  at  risk  and  premiums  vary.* 
When  amount  at  risk  rises  with  relation  to  premiums,  loss  to  risk 
descends  with  relation  to  loss  to  premiums  and  vice  versa.  This 
is  the  law  of  variation  found  in  the  relations  between  the  two  loss 
lines,  but  as  the  rate  line  also  represents  the  varying  relations 
between  amount  at  risk  and  premiums,  showing  the  annual  rise 
and  fall  of  each  with  relation  to  the  other,  it  would  seem  that  in 
the  absence  of  influences  disturbing  their  normal  percentage 
relations,  the  rise  and  fall  of  the  rate  line  above  and  below  its 
mean  line  would  show  proportionately  the  rise  and  fall  of  the 
dotted  line  above  and  below  the  line  of  loss  to  risk  in  each  dia- 
gram. 

That  the  range  of  variation  between  the  two  loss  lines  con- 
tains much  of  the  unwritten  history  of  state  rate  disturbances 
goes  without  saying.  Indeed,  it  might  be  said  that  the  stage 
upon  which  the  rate  drama  has  been  enacted  lies  between  the 
footlights  of  the  dotted  line  and  the  background  of  the  line  of 
loss  to  risk.  It  would  take  a  Sherlock  Holmes  to  unravel  the 
tangled  plot  of  melodrama  shown  by  these  two  lines  without 
explanatory  notes  in  the  shape  of  a  diary  of  the  rating  history  of 
each  state.  With  such  information  it  would  be  possible  to  analyze 
and  apply  quantitative  measurement  to  the  effects  produced  by 
these  disturbances,  through  ratio-diagrams,  quantitative  diagrams, 
and  differential  diagrams,  and  such  information  under  a  continu- 
ance of  present  conditions  would  doubtless  enable  us  to  forecast 
the  probable  results  of  specific  disturbances  with  a  certainty 
unknown  in  the  past.  The  limits  of  this  inquiry  will  not  permit 
such  investigation,  though  it  is  proper  to  make  the  suggestion 
plainer  by  an  examination  of  one  or  two  states  under  diagram- 
matic analysis. 

Utilizing  the  tabulations  from  which  the  previous  ratio-dia- 
grams were  constructed,  we  are  able  to  construct  quantitative 

♦It  will  assist  in  remembering  the  three  wave  lines  to  bear  in  mind  that  the  ratio  of 
loss  to  premiums  being  a  ratio  of  a  ratio  is  indicated  by  a  dotted  or  shadow  line  in  every 
diagram. 


178 


Fire-Rating  as  a  Science 


diagrams  of  each  state  for  the  same  thirteen-year  period,  showing 
the  rise  and  fall  in  amount  at  risk  and  premiums  above  and  below 
their  respective  mean  lines.  By  imposing  these  upon  the  same 
mean  line,  we  are  able  to  see  their  relations  to  each  other  each 
year,  as  shown  by  the  following  quantitative  diagrams  of  Massa- 
chusetts and  California. 

DIAGRAM  No.  29 
MASSACHUSETTS 
Quantitative  Diagram,   showing  relative  annual    increase  in 
amount  at  risk  and  premiums,  compared  with  their  average  for 
thirteen  years. 

Heavy  Line Amount  at  Risk= 

Light  Line - - Premiums. 




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State  Loss  Waves  in  the  Light  of  the  Diagram     179 


DIAGRAM  No.  30 
CALIFORNIA 
Quantitative  Diagram,   showing  relative  annual  increase  and 
decrease  in  amount  at  risk  and  premiums  compared  with  their 
average  for  thirteen  years. 

Heavy  Line --- - - Amount  at  Risk. 

Light  Line Premiums. 


1880    1891      1892     1883     188*    1886    1886     1807 


i8o 


Fire-Rating  as  a  Science 


In  the  two  preceding  diagrams  the  rise  and  fall  of  the  premium 
line  above  and  below  the  line  of  amount  at  risk  can  be  shown 
more  clearly  by  making  the  latter  a  straight  line  as  a  standard  of 
comparison,  as  shown  by  the  following  diagram  of  Massachusetts. 
If  we  now  compare  the  resulting  wave  of  premiums  with  the  rate- 
line  in  the  ratio-diagram  of  Massachusetts  (No.  17)  the  two  will 
be  found  to  be  identical  with  the  exception  of  the  variation  indi- 
cated by  the  dotted  line  in  the  following  diagram  which  shows 
the  divergence  of  average  rate-line.  This  line  was  constructed 
by  dividing  the  amount  at  risk  each  year  into  the  premiums  of 
the  same  year,  while  the  quantitative  line  was  constructed  by 
dividing  the  mean  or  average  amount  of  annual  premiums  into 
the  premiums  of  each  year,  and  the  mean  of  amount  at  risk  into 
annual  amount  at  risk.  In  view  of  the  widely  different  processes 
by  which  these  lines  were  constructed,  involving  an  entirely 
different  series  of  calculations,  the  similarity  of  the  two  lines  is 
notable. 

DIAGRAM  No.  31 

MASSACHUSETTS 
Diagram  showing  line  of  rise  and  fall  of  annual    premiums 
above  and  below  annual  amount  at  risk,  compared  with  rise  and 
fall  of  average  rate-line  for  same  period. 

Heavy  Line Annual  Premiums. 

Dotted  Line Average  Rate  Line. 


1887     1888     1889     1890     1891      1892     1893     1894     1896     1896     1897     1898     1899 


By  superimposing  upon  the  preceding  diagram  the  line  showir>g 
the  rise  and  fall  of  loss  to  premiums  above  and  below  the  line  of 


State  Loss  Waves  in  the  Light  of  the  Diagram      1 8 1 

loss  to  risk,  as  shown  in  ratio-diagram  of  Massachusetts  (page 
153),  we  have  the  following  differential  diagram  showing  the  an- 
nual relations  of  rate-line;  line  of  variation  between  premiums 
and  amount  at  risk,  and  line  of  variation  between  loss  to  premi- 
ums and  loss  to  risk. 

It  will  be  observed  that  the  last  named  follows  the  same 
general  direction  as  the  others,  varying  only  one  point  for  seven 
successive  years  (1887  to  1893  inclusive). 

DIAGRAM  No.  32 
MASSACHUSETTS 
Differential  diagram  containing  the  same  lines  as  the  preceding 
diagram,   with  additional  line  showing  rise  and  fall  of    loss  to 
premiums  above  and  below  line  of  loss  to  risk. 

Heavy  Line Annual  Premiums. 

Dotted  Line Average  Rate. 

Light  Line --- .- Loss  to  Premiums. 


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1887     1888     1889     1890     1891      i89S^    1893     1894     1896     1896     1897     1898     1899 


The  preceding  diagrams,  while  they  do  not  indicate  that 
Massachusetts  may  have  been  more  or  less  profitable  than  other 
states,  do  show  a  remarkable  absence  of  disturbed  relations  for 
thirteen  years  during  which  the  state  experienced  tremendous 
fluctuations  in  its  loss  ratio  caused  by  the  Boston  and  Lynn  con- 
flagrations of  1889  and  1893. 

In  marked  contrast  to  the  preceding  diagram  of  Massachusetts 
is  the  following  diagram  of  California,  constructed  for  the  same 
period,  and  in  the  same  way: 


I82 


Fire-Rating  as  a  Science 


DIAGRAM  No.  33 
CALIFORNIA 
Differential  diagram  containing  the  same  lines  shown  by  the 
preceding  diagram  of  Massachusetts. 

Heavy  Line Annual  Premiums. 

Dotted  Line Average  Rate. 

Light  Line Loss  to  Premiums. 






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Note:  It  should  be  borne  in  mind  that  as  premiums  ascend  in  relation  to  amount  at  risk, 
the  wave  of  premiums  in  the  quantitative  diagram  descends,  consequently,  in  order  to  show 
the  relations  with  rate  wave,  the  premium  wave  is  inverted  in  the  two  preceding  diagrams. 


State  Loss  Waves  in  the  Light  of  the  Diagram     1 83 

The  ratio-diagram  of  California  (No.  7)  shows  that  from  1887 
to  1894  (with  the  exception  of  one  year)  the  rate-line  ranged  from 
twenty  to  thirty  points  above  the  line  of  loss  to  premiums.  The 
business  was  so  profitable  that  no  agreement  could  be  maintained, 
and  the  cutting  of  rates  and  division  of  commissions  became  the 
rule  rather  than  the  exception.  Finally,  at  the  beginning  of  1895, 
the  situation  culminated  in  an  explosion  and  the  line  representing 
loss  to  premiums  soared  heavenward,  while  the  average  rate  line 
plunged  otherward.  It  will  be  observed,  however,  that  the 
dotted  line  ascends  far  above  the  line  of  loss  to  risk  because  of 
the  abnormal  descent  in  the  rate  line.  The  California  rate-war 
lasted  about  two  years,  when  rates  were  restored  at  about  thirty 
points  above  the  lowest  fluctuation  of  the  rate-line. 

In  the  New  York  diagram  (No.  23),  it  will  be  seen  that  the 
rate-line,  while  descending  rapidly,  remained  from  fifteen  to 
twenty-five  points  above  the  line  of  loss  to  premiums  from  1894 
to  1898.  The  inordinate  profits  created  by  this  brought  about  a 
reign  of  demoralization,  which,  as  in  California,  culminated  in 
a  bomb-like  explosion  that  sent  the  dotted  line  skyward  where 
the  diagram  leaves  it  suspended  like  Mahomet's  coffin,  and  the 
more  recent  record  of  the  state  for  the  past  year  gives  no 
indication  of  its  return  to  earth.  The  two  ratio-diagrams  of 
California  and  New  York  teach  in  a  forcible  manner  the  lesson, 
that  it  is  a  bad  omen  in  fire  insurance  when  the  rate-line  is 
allowed  to  soar  too  long  and  too  far  above  the  loss  lines. 

In  dealing  with  large  statistical  aggregates  running  into  nin« 
or  ten  figures,  there  is  a  tendency  in  the  popular  mind  to  attach 
undue  importance  to  disturbing  influences,  seemingly  important 
in  themselves,  but  really  trivial  when  compared  with  grand  totals. 
It  is  true  that  rates  are  constantly  subject  to  these  influences, 
but  as  a  rule  they  either  offset  each  other  or  are  so  insignificant, 
when  compared  with  statistical  aggregates,  as  to  lose  themselves 
in  the  immensity  of  figures.  While  all  our  ratios  are  more  or  less 
subject  to  minor  perturbations  from  local  and  temporary  causes, 
the  average  rate  in  the  Western  states  has  for  years  exhibited  a 
notable  downward  tendency,  caused  by  the  gradual  substitution 
of  brick  for  frame.  This  tendency,  however,  has  been  a  con- 
stantly diminishing  quantity,  and  east  of  the  Missouri  River  has 


184 


Fire-Rating  as  a  Science 


become  imperceptible.    In  the  newer  Western  and  Southern  states 
it  is  still  a  measurable  influence. 

When  a  state,  during  a  given  year,  shows  a  large  increase  in 
amount  at  risk,  about  half  the  losses  on  annual  risks  accrue  dur- 
ing the  next  year.  If,  during  the  next  year,  the  volume  of  busi- 
ness is  largely  diminished,  it  follows  that  the  losses  on  the  larger 
amount  must  be  charged  to  a  year  of  small  business,  and  the 
ratios  of  loss  to  risk  and  loss  to  premiums  will  both  be  materially 
increased.  At  times  this  increase  in  volume  may  be  on  either  a 
high  or  low  rate  wave,  which,  in  either  case,  disturbs  the  ratio 
between  amount  at  risk  and  premium.  This  phenomenon  is  most 
noticeable  in  the  agricultural  states,  where  a  year  of  large  or 
small  crops  may  cause  a  considerable  change  in  volume  of  busi- 
ness. It  is  also  proper  to  take  into  consideration  the  fact  that 
the  annual  increase  in  national  wealth,  which  is  estimated  at  about 
four  per  cent,  has  a  tendency  to  create  in  many  states  an  apparent 
profit,  year  after  year,  which  must  eventually  disappear  when  the 
amount  of  insurable  property  ceases  to  increase. 

TABLE   COMPARING  AMOUNT  AT   RISK  AND   PREMIUMS 
OF    1887   WITH   THOSE   OF    1899 


States. 

Arkansas 

Georgia 

Colorado 

North    Dakota — 1890-- 
South    Dakota — 1890  .- 

Illinois 

Iowa 

Kansas 

Kentucky 

Massachusetts 

Michigan 

Minnesota 

Missouri 

New  Jersey 

Nebraska 

Ohio 

Pennsylvania 

Tennessee 

Texas 

Wisconsin 

Oklahoma — 1891 

Indian  Territory — 1891 


Amount  at  Risk, 

Amount  at  Risk, 

Per  Cent 

1887. 

1899. 

of  Gain. 

$  26,509,590 

$     58,252,947 

120 

115,292,842 

177,137.318 

54 

48,570.113 

123,085,228 

153 

17,109,760 

35,846,362 

no 

18,515.305 

27,217,678 

47 

806,454,052 

1,141,060,852 

42 

190,954,696 

280,071,272 

47 

131,148,505 

183,444,721 

40 

161,271,533 

201,319,734 

25 

573,023,604 

912,129,097 

59 

241,717,833 

370,791,030 

53 

223,062,679 

309,860,117 

39 

345,519.997 

455,156,845 

32 

316,313,369 

565,003,431 

79 

89,103,912 

121,390,473 

36 

447,054,235 

718,428,503 

61 

729,037,662 

1,097,119,021 

50 

91,177,649 

156,448,397 

72 

123,136,846 

277,853,544 

126 

192,081,477 

338,230,869 

76 

715,768 

14,568,981 

1937 

2,044,876 

13,520,035 

561 

State  Loss  Waves  in  the  Light  of  the  Diagram      185 

In  order  to  show  approximately  the  effects  of  this  increase  in 
creating  an  apparent  profit  in  each  state,  it  would  be  necessary  to 
construct  a  companion  series  of  diagrams  showing  the  quantita- 
tive relations  each  year  between  the  amount  at  risk  and  premi- 
ums, embracing  the  same  period  shown  by  the  state  ratio-dia- 
grams. 

The  effects  of  a  steady  increase  in  amount  at  risk  and  premi- 
ums may  be  inferred  from  the  preceding  tabulation,  showing  a 
comparison  between  the  years  1887  and  1899  in  amounts  and 
percentage  of  increase. 

The  following  table  indicates,  approximately,  the  per  cent  of 
fictitious  annual  underwriting  profits  appearing  in  our  statistics, 
occasioned  by  annual  growth  in  amount  at  risk  for  the  years  1897, 
1898,  and  1899: 

PERCENTAGES  OF   FICTITIOUS   PROFITS 


Colorado 

Illinois 

Iowa 

Kansas 

Michigan 

Minnesota 

Missouri 

Nebraska 

Ohio 

Wisconsin 

Indian  Territory  _— 
Oklahoma  Territory 

North  Dakota 

South  Dakota 


1897. 

1898. 

2 

I 

4 

0 

3 

3 

5 

2 

3 

4 

2 

5 

0 

3 

4 

4 

5 

2 

3 

4 

14 

13 

19 

19 

10 

3 

9 

2 

9 

4 

'/ 

10 

6 

I 

6 
3 
4 
15 
19 
13 
9 


The  profits  of  many  states  would  be  materially  reduced  if  we 
should  eliminate  this  illusive  percentage  of  apparent  profit  which 
has  accrued  from  what  is  known  in  sporting  parlance  as  ''playing 
on  velvet." 

Without  doubt  this  percentage  of  apparent  profit  in  some  of 
the  newer  states  and  territories  has  far  more  than  offset  any 
reduction  in  average  rate  from  the  substitution  of  brick  for  frame 
business.  While  these  two  counter-balancing  influences  (resulting 
from  improved  construction  on  the  one  hand  and  rapid  increase 
in  volume  of  business  on  the  other)  have  tended  to  neutralize 


1 86  Fire-Rating  as  a  Science 

each  other,  there  can  be  no  doubt  that  the  rate-line  in  the  dia- 
grams is  substantially  correct  in  showing  the  real  trend  of  rates 
in  the  Western  states.  The  fluctuation  of  this  line,  as  shown  by 
the  ratio-diagrams,  is  full  of  information  of  exceptional  interest 
at  the  present  time.  It  is  a  well-known  fact  that  immediately 
following  the  panic  years  of  1892  and  1893  there  was  a  general 
advance  in  rates  throughout  the  West  of  about  tv/enty-five  per 
cent.  The  disastrous  results  of  this  arbitrary  advance,  in  adverse 
legislation,  and  the  phenomenal  growth  of  irresponsible  compe- 
tition, is  a  matter  of  history.  The  rates  so  summarily  hoisted 
without  regard  to  ultimate  consequences,  as  will  be  seen  by  the 
diagrams  of  all  the  Western  states,  began  to  come  down  at  once, 
and  have  been  sinking  ever  since,  but  the  extent  of  the  decline 
in  each  state  is  shown  for  the  first  time  in  the  preceding  state 
diagrams.  The  decline  in  the  rate-line  since  1893  may  be 
summed  up  as  follows: 

TABLE   SHOWING  DESCENT   IN   RATE   LINES   FROM   1893 
TO   1899,  INCLUSIVE 

In  Arkansas (average  rate  216)  61  points  or  28  per  cent. 

In  Colorado (average  rate  166)  27  points  or  16  per  cent. 

In  Illinois (average  rate  125)  14  points  or  11^  per  cent. 

In  Iowa (average  rate  167)  19  points  or  11  percent. 

In  Kansas (average  rate  140)  37  points  or  26  per  cent. 

In  Michigan (average  rate  151)  29  points  or  18  per  cent. 

In  Minnesota (average  rate  157)  30  points  or  19  per  cent. 

In  Missouri (average  rate  141)  36  points  or  26  per  cent. 

In  Nebraska (average  rate  169)  46  points  or  27  per  cent. 

In  Ohio (average  rate  119)  21  points  or  18  per  cent. 

In  Texas (average  rate  179)  30  points  or  17  per  cent. 

In  Wisconsin (average  rate  166)  33  points  or  20  per  cent. 

In  view  of  the  fact  that  present  rates  ensure  an  underwriting 
loss,  it  will  be  instructive  to  refer  again  to  the  state  diagrams 
and  note  the  positions  of  the  line  of  loss  to  premiums  and  rate 
line  with  relation  to  their  mean  line  and  to  each  other  at  the 
beginning  of  the  year  1900.  This  is  shown  by  the  following 
tabulation ; 


State  Loss  Waves  in  the  Light  of  the  Diagram      1 87 

TABLE    SHOWING    POSITION   AT   THE    BEGINNING   OF  THE 

YEAR    1900    OF     LINE    OF    LOSS    TO    PREMIUMS    AND 

LINE   OF   AVERAGE   RATE,  WITH    RELATION  TO 

THEIR  MEAN  LINE  AND  TO   EACH   OTHER 


Loss  to 
Premiums. 


Average 
Rate. 


Loss  to  Premiums 

Above  Average 

Rate. 


Ohio 

Illinois --- 
Michigan  _ 
Wisconsin 
Minnesota 

Iowa 

Missouri -- 
Kansas  -  -  - 
Nebraska  - 
Colorado  - 
Arkansas  - 
Texas  


+19 
+14 

—  3 

—  4 

—  2 

+  I 

—  7 
--  7 
--  I 

7 

I 

—  2 


— 12 

—  5 
—20 
—16 
-15 

—  7 
—17 
—22 
—29 
—24 
—29 
—14 


31  points 
19  points 
17  points 

12  points 

13  points 
8  points 

10  points 

29  points 

30  points 
41  points 
30  points 
12  points 


Note:  The  plus  mark  indicates  above  the  mean  line,  and  the  minus  mark  below  the 
mean  line. 

"  The  progress  of  human  knowledge  has  all  along  been  equally  charac- 
terized by  analysis  and  synthesis;  by  the  differentiation  implied  in  the 
recognition  of  relations  that  are  more  and  more  special,  as  well  as  by  the 
integration  implied  in  the  grouping  of  relations  in  classes  that  are  more 
and  more  general."  * 

A  necessary  corollary  of  the  above  is  that  the  greater  the 
number  and  diversity  of  the  relations  we  are  able  to  establish 
between  any  given  phenomenon  and  other  phenomena,  the  nearer 
we  approach  to  a  true  understanding  of  its  nature. 

An  effort  has  been  made  in  this  chapter  to  utilize  our  data  in 
establishing,  through  the  symbolic  notation  of  the  diagram,  a 
few  of  the  most  suggestive  relations  among  the  phenomena  of 
fire  insurance  waves.  These  relations  may  be  summed  up  as 
follows : 

The  sequential  relation  of  each  ratio  with  its  own  mean  or 
average  for  a  given  period  of  years. 

The  contemporaneous  relation  of  each  ratio  with  other  ratios. 

The  quantitative  relations,  in  annual  sequence,  of  amount  at 
risk  and  premiums  to  each  other  and  to  their  respective  mean 
lines. 

♦Cosmic  Philosophy,  John  Fiske. 


1 88  Fire-Rating  as  a  Science 

The  deviation  between  the  two  loss  ratios  and  the  relation  of 
this  deviation  to  the  fluctuations  of  the  average  rate-line,  as  well 
as  to  the  quantitative  relations  between  amount  at  risk  and 
premiums. 

The  law  of  fictitious  profits  or  losses,  arising  from  quantita- 
tive variations  in  amount  at  risk. 

The  total  descent  in  rate-line  from  maximum  for  each  state, 
stated  in  points  and  percentage. 

The  present  position  of  each  ratio  with  relation  to  its  mean 
line  and  to  other  ratios. 

If  the  object  of  all  reasoning  is  the  establishment  of  relations, 
we  have  here  an  array  of  relations  which  ought  to  enable  us  to 
avail  ourselves  of  the  process  known  as  dead  reckoning  in  order 
to  determine  our  position  with  relation  to  the  sun  of  known  cost, 
in  which  the  mean  lines  of  income  and  outgo  converge.  But  there 
is  an  unknown  quantity,  without  which  we  can  determine  our 
position  only  with  relation  to  each  state,  as  a  whole.  The 
exigencies  of  rating  demand  that  we  should  know  these  relations 
with  regard  to  classes  and  the  unknown  quantity  which  would 
enable  us  to  determine  these  relations,  if  it  exists,  is  at  present 
carefully  guarded  in  the  strong  boxes  of  the  companies. 


Dead  Reckoning 


In  some  states,  if  we  add  the  expense  ratio  to  the  loss  ratio 
for  the  thirteen-year  period,  embraced  in  the  diagrams  in  the 
preceding  chapter,  the  total  makes  a  cost  ratio  of  exactly  one 
hundred  per  cent,  which  signifies  that  exactly  one  dollar  was 
expended  for  each  dollar  received  in  these  states;  hence,  the 
rates  of  these  states,  taken  as  a  whole,  would  be  cost  estimates 
if  our  experience  with  all  classes  had  been  uniform,  but  experi- 
ence by  classes  has  not  been  uniform.  In  these  states,  where  the 
business  as  a  whole  has  been  written  for  thirteen  years  at  exact 
cost,  we  have  made  a  profit  on  some  classes  and  a  loss  on  others. 
If  we  had  the  combined  experience  of  the  companies  on  each 
class  in  these  states  year  by  year,  it  would  be  possible  to  construct 
diagrams  of  ratios  and  quantities,  and  thus  establish  relations  for 
each  class  similar  to  the  relations  established  among  state  ratios 
in  the  preceding  chapter;  but  this  data  is  unobtainable,  and  the 
estimating  faculty  we  call  into  play  in  establishing  basis  tariffs 
must  be  utilized  in  establishing  the  estimates  of  relative  cost 
necessary  as  a  working  hypothesis  in  scientific  rating. 

It  may  be  said  that  every  science  in  existence  has  started  with 
hypotheses  or  provisional  assumptions  which  have  one  by  one  been 
proven  or  discarded,  and  fire-rating  is  no  exception  to  this  rule. 
It  must  utilize  provisional  assumptions.  It  does  not  follow  that  in 
the  establishment  of  any  given  series  of  assumptions  to  be  used  as 
standards  for  ratiocinative  proof,  we  are  necessarily  barred  from 
utilizing  such  data  as  we  have,  or  from  following  the  reasoning 
methods  upon  which  all  science  is  based,  but  it  does  follow  that 
the  establishment  of  such  assumptions  in  fire-rating  is  a  work  for 
trained  thinkers  untrammeled  by  considerations  of  expediency, 
personal  interference,  or  the  political  influences  which  beset  fire 
insurance  from  within  and  without.  The  work  must  be  founded 
upon  correct  reasoning  freed  from  extraneous  influences,  for  the 
end  sought  is  a  logical  system  of  coexistent  relations  to  be  used 

189 


190  Fire-Rating  as  a  Science 

as  a  standard  of  comparison.  The  thing  to  be  built  is  not  a  price 
list  to  be  enforced  by  the  companies,  but  a  national  basis  schedule 
of  estimated  cost-relations  based  as  nearly  as  possible  upon  com- 
bined experience.  The  companies  must  furnish  the  information, 
but  the  work  of  analyzing  it  and  establishing  the  relations  sought 
in  our  complex  standard  is  not  a  work  for  caucus  or  cabal.  When 
these  relations  have  once  been  established,  and  state  schedules  of 
estimated  cost  relations  constructed  to  show  rational  percentage 
relations  to  this  national  schedule,  and  the  country  has  been 
rated  upon  this  basis,  it  will  then  be  for  the  companies  to  say 
collectively  or  individually  what  relation  their  rates  or  selling 
prices  shall  bear  to  this  standard  of  estimated  cost  relations. 

It  follows  that  what  we  really  need  is  not  exact  cost  on  each 
class  in  each  state,  but  a  system  of  permanent  coexistent  rela- 
tions to  be  used  as  standards  in  adjusting  our  selling  prices. 
These  standards  we  are  justified  in  calling  estimated  cost  relations 
because  they  are  inte?ided  to  show  the  cost  of  our  goods  instead  of  the 
selling  price.  The  essential  point  is  to  have  standards  by  which 
to  measure  wave  motion,  and  that  these  standards  be  permanently 
established  in  order  that  they  may  serve  their  purposes  as  stand- 
ards. For  practical  purposes,  it  matters  not  whether  they  be  too 
high  or  too  low,  for  in  either  event  they  will  serve  their  purpose 
as  standards,  provided  they  remain  stationary  and  are  not  changed 
to  suit  individual  caprice.  Nor  is  it  even  essential  in  a  national 
schedule  that  the  basis  schedules  of  individual  classes  should  bear 
true  relations  to  each  other^  for  each  is  intended  to  serve  for  the 
standard  of  its  class  only. 

Minor  considerations,  however,  make  it  desirable  that  a 
national  schedule  of  this  kind,  as  nearly  as  possible,  be  based 
upon  the  average  experience  of  all  states.  In  other  words,  what 
we  call  cost  should  be  as  near  cost  as  we  are  able  to  make  it.  It 
is  an  interesting  question  how  best  to  approximate  this  average 
cost  in  a  standard  national  schedule,  and  while  the  whole  subject 
of  tariff  construction,  depending  as  it  does  solely  upon  appraisal 
of  analyzed  hazard,  lies  outside  of  the  discussion  of  fire-rating  as  a 
science,  it  seems  worth  while  to  submit  the  following  suggestions: 

The  average  rate  of  any  given  state  is  determined  largely  by 
the  character  of  its  dominant  hazards.      A  state  with  a  high  loss 


Dead  Reckoning  191 

ratio  may  have  many  classes  rated  lower  than  another  state  show- 
ing a  low  average  rate,  and  vice  versa.  When  we  turn  to  the  ratio 
of  loss  to  premiums  we  find  that  this  ratio,  which  is  a  percentage 
of  a  percentage,  may  be  high  in  a  state  with  a  low  average  rate, 
or  the  contrary.  If,  however,  we  deduct  from  the  average  rate 
the  per  cent  of  underwriting  profit,  we  have  the  rate  of  average 
cost,  and  in  states  where  the  deduction  shows  the  cost  so  obtained 
to  be  the  same  as  the  national  cost,  it  follows,  if  the  state  has 
been  rated  by  tariff,  that  we  obtain  in  this  tariff  a  set  of  estab- 
lished cost  relations  more  or  less  true,  but  at  least  established 
relations  which  would  serve  as  a  clue  in  building  a  national  tariff 
of  estimated  cost  relations. 

A  comparison  of  this  sort  shows  that  the  cost  ratio  of  three 
states  (Massachusetts,  Pennsylvania,  and  Illinois),  is  substantially 
identical  with  the  national  cost  ratio.  We  find  by  further  compari- 
son that  in  these  three  states  the  ratio  of  loss  to  amount  at  risk 
is  also  practically  identical  with  the  same  ratio  in  the  national 
experience  for  ten  years,  as  shown  in  the  table  on  page  124.  It 
is  true  that  if  we  select  any  given  class  in  any  one  of  these 
states,  we  shall  probably  find  its  rates  materially  different  from  its 
rates  in  the  other  states,  and  the  adjustment  of  these  differences 
must  be  a  matter  of  judgment.  The  point  is,  that  in  these  three 
states,  we  find  established  relations  covering  a  wide  variety  of 
important  classes,  which,  as  a  whole,  give  exact  national  cost, 
hence,  these  relations  constitute  a  logical  basis  of  reckoning  in 
the  effort  to  establish  a  national  tariff  of  cost  estimates,  for  use 
as  a  standard,  which  will  be  reasonably  close  to  what  it  purports 
to  be.  It  may  be  assumed  that  the  states  having  the  largest 
amount  of  a  given  class  of  business  will  best  understand  this 
business,  and  naturally  have  the  most  complete  basis  schedule 
for  this  class.  Massachusetts  is  the  natural  center  of  textile 
industries,  leather-workers,  paper-mills,  and  many  other  impor- 
tant industrial  classes.  Pennsylvania  is  the  center  of  industries 
connected  with  mining,  and  is  doubtless  provided  with  complete 
schedules  for  coal  and  iron  risks,  glass  factories,  etc.,  while  in 
Illinois  we  find  the  dominant  hazards  to  be  packing  establish- 
ments, elevators,  breweries,  distilleries,  lumber,  wood-workers, 
and  other  hazards  connected  with  the  output  of  the  Northwest. 


ig2  Fire-Rating  as  a  Science 

In  these  three  states  we  have,  ready  to  hand,  approximate 
cost  relations  established  for  nearly  all  the  leading  classes  of  the 
country.  These  relations  would  constitute  a  guide  in  the  con- 
struction of  a  national  schedule,  and  this  schedule  when  con- 
structed would,  with  present  data,  constitute  the  nearest  possible 
approximation  to  the  average  cost  relations  of  the  aggregate  busi- 
ness of  the  country,  which  is  the  end  sought.  This  tariff  once 
constructed,  the  average  cost  of  other  states,  as  indicated  by 
percentage  of  underwriting  profit,  would  furnish  a  reliable  clue 
to  the  percentage  increase  or  decrease  necessary  in  the  compara- 
tively simple  task  of  constructing  state  tariffs  of  cost  relations  as 
standards  for  the  construction  of  local  tariffs. 

When  the  mariner,  in  time  of  stress,  seeks  to  determine  the 
position  of  his  vessel  on  the  sunless  waters,  he  is  forced  to  resort 
to  the  log  and  compass  in  the  process  known  as  "dead  reckon- 
ing," and  in  this  process  he  is  compelled  to  make  proper  allow- 
ance for  drift  and  leeway.  In  the  "dead  reckoning"  to  which 
in  our  time  of  emergency  we  must  resort,  in  order  to  determine 
the  position  of  the  sun  of  fire  cost,  it  is  proper  to  make  due  allow- 
ance for  the  drift  and  leeway  of  our  business,  by  the  exercise  of 
common  sense,  but  it  is  not  necessary  to  quibble  over  niceties 
until  our  ship  goes  ashore  among  the  breakers.  To  quote  the 
advice  of  an  eminent  scientist: 

"  Minor  perturbing  influences  must  for  a  time  be  left  out  of  considera- 
tion just  as  the  inequalities  of  motion  resulting  from  the  attraction  of  planets 
were  at  first  passed  over  in  the  search  for  the  law  of  gravitation." 

After  all,  absolute  cost  is  to  the  science  of  fire-rating  what 
the  ultimate  atom  is  to  the  chemist.  No  one  has  ever  seen  or 
will  see  an  atom.  It  is  possibly  as  far  beyond  the  reach  of  the 
microscope  as  the  limits  of  space  are  beyond  the  reach  of  the 
telescope.  There  is  a  wide  range  of  opinion  as  to  what  the 
atom  is,  but  without  wasting  time  in  fruitless  speculation,  the 
chemist  utilizes  the  theoretical  atom  he  is  compelled  to  assume 
as  the  working  hypothesis  of  his  science. 

Our  perturbed  conception  of  fire-cost  as  a  something  unat- 
tainable by  measurement,  becomes  clarified  when  we  realize  that 
the  thing  we  call  cost,  like  Epictetus'  definition  of  a  syllogism, 
is  '  ^f/ie  measuring -rod  and  not  the  thing  measured. ' ' 


Drift  and  Leeway 


In  computing  the  state  diagrams  which  appear  in  a  previous 
chapter,  a  period  of  thirteen  years  was  selected  in  order  to  obtain 
three  years'  experience  as  a  starting  point,  for  the  purpose  of 
showing  by  comparison  what  the  annual  cost  wave  would  have 
been  in  computing  each  year  from  the  average  of  the  preceding 
three  years,  but  subsequent  investigation  showed  that  a  line  so 
constructed  would  not  be  the  cost  line  resulting  from  an  intelli- 
gent control  of  rates.  In  any  rational  system  the  lines  of  loss 
ratio  as  a  cause  would  logically  determine  the  average  rate  line 
as  an  effect.  In  the  past  they  have  exercised  an  interacting 
influence.  The  loss  ratio  lines  have  influenced  the  rate  line,  and 
the  rate  line  has,  in  obscure  and  perplexing  ways,  exercised  a 
reflex  influence  upon  both  loss  lines.  This  reciprocal  influence 
has  tended  to  create  illusive  appearances  which  in  no  small  meas- 
ure have  helped  to  cause  the  welter  of  unreason  from  which 
sooner  or  later  it  will  be  necessary  to  extricate  fire-rating. 

Of  the  three  lines,  the  rate  line  has  been  a  line  of  expediency, 
and  the  line  of  loss  to  premiums  has  been  simply  a  ratio  of  this 
expediency.  To  attempt  to  trace  out  a  logical  rate  line  from  the 
loss  to  premium  line  would  be  as  fruitless  as  an  attempt  to  inter- 
pret the  laws  of  causation  manifested  in  the  wheeltracks  of  a 
buggy  hitched  to  a  shying  horse.  Of  the  three  lines,  that  of  loss 
to  risk  alone  exhibits  a  record  of  the  real  laws  of  causation  in 
fire  destruction  per  se^  and  while  this  line  is  supposed  to  exhibit 
a  close  approximation  to  the  real  ratio  of  loss  to  amount  at  risk, 
it  too,  has  been  distorted  by  obscure  influences  which  would 
gradually  disappear  with  the  introduction  of  scientific  method  in 
rating. 

Among  the  influences  which  have  created  these  illusive  appear- 
ances and  which  have  affected  all  three  of  the  ratio  lines,  the  most 
important  has  been  the  wide  differences  year  after  year  in  amount 
at  risk.     These  differences  have  created  deceptive  appearances 

193 


194  Fire-Rating  as  a  Science 

of  underwriting  profit  or  the  contrary.  While  in  any  long  period 
of  years  this  influence  becomes  more  or  less  absorbed,  it  has  in 
the  past  often  exercised  an  important  effect  in  determining  the 
course  of  all  three  of  the  ratio  lines.  An  analytical  comparison 
of  the  amount  at  risk,  in  the  quantitative  diagram  of  a  state,  with 
the  line  of  loss  to  risk  in  the  ratio  diagram  of  the  same  state 
would,  it  is  true,  enable  us  to  figure  out  closely  the  effect  of  these 
changes  in  the  annual  amount  at  risk  upon  the  statistics  of  the 
succeeding  year,  but  the  problem  is  further  complicated  by 
the  growth  of  moral  hazard  and  blanket  insurance  during  periods 
of  rate  demoralization.  These  causes,  as  well  as  the  quantitative 
reasons  mentioned,  all  tend  to  disturb  the  reliability  of  both  the 
loss  lines  as  indicative  of  actual  experience. 

A  comparison  of  the  quantitative  wave  of  any  state  showing  the 
amount  at  risk  each  year  with  the  wave  of  loss  to  risk,  reveals  the 
fact  that  these  waves  almost  uniformly  pulsate  in  opposite  direc- 
tions. This  phenomenon  is,  of  course,  subject  to  exceptions 
caused  by  large  fires  and  other  unforeseen  influences,  but  the  pulsa- 
tion is  so  regular  as  to  establish  the  law  that,  with  normal  losses,  as 
amount  at  risk  goes  up,  loss  to  risk  goes  down  and  vice  versa. 

It  follows  that  a  true  understanding  of  relations  can  be  obtained 
only  by  expert  analysis  which  takes  careful  account  each  year  of  the 
proportion  of  total  risks  on  which  losses  occur  during  the  succeed- 
ing year,  or  what  is  the  same  thing  in  effect,  of  unearned  premiums. 

An  illustration  of  the  deceptive  appearances  in  our  annual 
statistics  is  found  in  California.  The  ratio  diagram  of  this  state 
(page  133)  shows  a  tremendous  drop  in  the  rate  line  and  a  cor- 
responding rise  in  the  line  of  loss  to  premiums  during  1895  and 
1896.  Had  there  been  a  large  increase  or  decrease  in  the  amount 
of  risk  during  either  of  these  years,  there  would  have  been  a  cor- 
responding fluctuation  in  the  loss-to-risk  line,  but  as  shown  by 
the  diagram  it  varies  only  four  points  from  1895  to  1899  inclu- 
sive. We  find,  however,  that  the  amount  at  risk  rose  about  forty 
per  cent  in  1898  over  1897.  As  about  half  the  losses  on  any 
given  year's  business  are  paid  the  next  year,  this  naturally  would 
have  caused  a  large  drop  in  the  loss-to-risk  line  during  1898,  but 
the  ratio-diagram  shows  a  drop  of  only  two  points.  This  would 
indicate  that  under  normal  conditions  loss  to  risk  was  increased 


Drift  and  Leeway  195 

about  twenty  points  by  blanket  insurance,  term  risks  written 
during  the  rate  war,  and  moral  hazard  resulting  from  the  same 
cause.  In  spite  of  this  fact  the  official  figures  give  no  indication 
of  the  real  phenomena  shown  by  the  ratio  lines.  Illusive  appear- 
ances of  this  kind  permeate  the  official  statistics  of  fire  insurance 
and  are  a  constant  source  of  illogical  inference  not  only  on  the 
part  of  the  public  but  of  fire  underwriters  as  well.  This  species 
of  astigmatism,  caused  by  deceptive  appearances,  can  be  cured 
only  by  expert  analysis  which  as  far  as  possible  will  eliminate 
from  our  statistical  aggregates  these  appearances  and  allow  us 
to  see  the  naked  truth.  No  analysis  of  this  kind  has  ever  been 
attempted  or  possibly  ever  conceived,  but  it  is  only  through  such 
analyses  that  we  can  take  into  accurate  account  the  **drift  and 
leeway"  which  enters  into  the  rating  problem. 

This  drift  and  leeway,  however,  is  largely  incident  to  existing 
methods.  With  the  introduction  of  scientific  rating,  with  stand- 
ard cost  estimates  and  flexible  rates,  the  aberrations  caused  by 
disturbed  conditions  would  become  a  diminishing  quantity,  and 
those  caused  by  fluctuation  in  amount  at  risk  would  become  purely 
a  matter  of  mathematical  computation.  It  is  probable  that  with 
the  establishment  of  scientific  method,  experience  would  soon 
show  the  logic  of  having  no  fixed  periods  for  rate  modifications, 
except  as  judgment  might  suggest.  In  some  classes  or  states 
rates  might  properly  be  permitted  to  remain  unchanged  indefi- 
nitely, while  in  others,  changes  might  seem  advisable  every  year. 
The  all-important  thing  is  that  rate  changes  could  be  made  con- 
cretely or  discretely  anywhere  or  everywhere  without  delay  or 
expense  and  without  disrupting  or  even  disturbing  a  vast  system 
of  published  tariffs.  Under  such  conditions  the  line  of  annual 
loss  to  premiums  would  become  obsolete.  A  new  line  of  annual 
cost  would  take  its  place  and  the  difference  between  this  and  the 
line  of  annual  premiums,  or  underwriting  income,  would  show  the 
margin  of  underwriting  profit  or  loss  each  year,  pointing  out 
unmistakably  after  an  annual  reckoning  of  drift  and  leeway  just 
what  should  be  done  with  the  rates  of  any  class  in  any  state.* 

*There  is  a  constant  ebb  and  flow  of  hazard  resulting  from  the  introduction  of  new 
methods  of  heating,  lighting,  and  motive  power,  new  industrial  processes,  new  structural 
features  in  buildings,  and  improved  lire  oetecting,  extinguishing,  and  retarding  devices. 
These  things,  however,  properly  belong  to  tariff  construction,  through  which  their  effects 
are  gradually  revealed  in  statistical  aggregates;  hence,  thev  are  not  legitimately  a  part  of 
the  drift  and  leeway  resulting  from  illusive  appearances  in  these  aggregates. 


Summary 


Our  inquiry  as  to  the  possibilities  and  limitations  of  fire-rating 
as  a  science  began  with  an  investigation  of  the  fundamental 
principles  on  which  all  science  is  based.  As  these  principles  con- 
stitute the  premise  on  which  this  inquiry  is  based,  it  is  proper  to 
state  that  no  principle  was  enunciated  that  is  in  dispute  among 
acknowledged  scientific  authorities.  These  generalizations  are 
to-day  the  common  property  of  manlcind,  constituting  the  founda- 
tion on  which  the  structure  of  modern  science  has  been  erected. 

Adopting  these  definitions  which,  in  substance,  express  the 
consensus  of  modern  scientific  thought,  the  way  was  clear  for  sub- 
sequent inquiry  into  the  nature  of  the  phenomena  with  which  the 
activity  known  as  fire-rating  has  to  deal,  in  order  to  determine 
the  possibilities  and  limitations  of  this  activity  as  a  science  under 
the  definitions  given.  This  inquiry  revealed  that  in  conformity 
with  the  laws  governing  intelligence,  the  classifying  and  reason- 
ing faculties  had  empirically  accomplished  their  task  up  to  the 
barriers  imposed  by  self-interest.  As  the  flat-head  Indian's  skull 
and  the  Chinese  woman's  foot  are  the  distorted  results  of  com- 
presses imposed  by  immemorial  custom,  so  it  may  be  said  that 
fire-rating  as  an  organic  growth  is  the  result  of  an  artificial  swath- 
ing imposed  upon  it  by  the  conventional  intellects  who  deny  its 
birthright  as  a  science,  because  it  is  unable  to  burst  the  bandages 
imposed  upon  it  by  their  motherly  care. 

"Every  science  may  be  said  to  date  from  the  discovery,  among  the 
phenomena  with  which  it  is  concerned,  of  some  fundamental  principle 
which  serves  to  organize  into  a  coherent  ratiocinative  body  of  knowledge 
that  which  has  hitherto  been  an  incoherent  empirical  body  of  knowledge."* 

This  fundamental  principle  in  fire-rating  lies  in  the  unrecog- 
nized or  at  least  unacknowledged  fact  that,  as  an  activity,  it  is 
concerned  with  a  specific  manifestation  of  the  cosmic  law  of 
rhythm ;  that  it  has  to  do  with  the  properties  of  waves  of  fire 

♦Outlines  of  Cosmic  Philosophy,  John  Fiske. 

196 


Summary  1 97 

destruction,  and  by  implication  that  it  must  recognize  all  the 
properties  of  the  phenomena  with  which  it  is  concerned.  Among 
these  we  find  the  property  of  destructiveness  resulting  from 
amplitude  of  vibration  with  its  necessary  corollary  that  the  real 
economic  end  of  fire-rating  as  a  science  is  to  temper  these  waves 
into  dimensions  which  will  be  endurable  to  property  interests. 

Granting  that  every  human  industry  emanates  from  the  bread- 
and-butter  motive,  we  are  compelled  to  recognize  on  the  other 
hand  that  the  community  is  the  universal,  if  indirect,  employer 
of  all  industrial  activity,  and  the  work  must  be  done  to  suit  the 
employer  rather  than  the  employed. 

In  the  logical  modification  of  the  wave  of  annual  fire  destruc- 
tion, and  the  scientific  dispersion  of  its  excesses  over  and  above 
endurable  limits  through  ancillary  rate  waves,  lies  the  real  utility 
of  fire  insurance  to  the  community,  and  in  the  performance  of  this 
duty  satisfactorily,  the  industry  is  entitled  (and  no  one  will  dispute 
its  right)  to  exact  its  reasonable  wage. 

Under  this  definition  of  its  raison  d'etre^  we  find  beneath  the 
confused  phenomena  of  fire-rating  the  fundamental  principle 
which  must  ultimately  change  our  incoherent  empirical  body  of 
knowledge  into  a  coherent  ratiocinative  body  of  knowledge. 

But  every  science  which  reaches  the  stage  of  quantitative 
measurement  needs  a  symbolic  language  of  its  own  in  order  that 
it  may  possess  an  instrumentality  for  intelligent  investigation  and 
discussion  of  the  phenomena  with  which  it  deals. 

We  find  the  possibilities  of  this  symbolic  language  in  the  dia- 
gram, which  as  a  symbol  is  applicable  to  all  the  diverse  and  com- 
plicated relations  involved  in  the  ratios  with  which  the  activity 
of  fire-rating  is  concerned,  and  (while  the  diagram  will  reveal 
unerringly  the  messages  hidden  in  our  statistics)  as  the  algebraic 
equation  must  in  its  finality  be  converted  into  Arabic  numerals 
if  we  would  learn  its  concrete  meaning,  so  diagrams  must  in  the 
end  be  interpreted  through  statistical  tabulations  if  we  would 
obtain  exact  quantitative  results. 

An  inherent  property  of  waves  is  ceaseless  motion,  and  any 
rating  system  intended  to  measure  and  modify  this  motion  must, 
like  the  waves  themselves,  possess  the  quality  of  mobility,  a 
mobility  which  will  admit  of  instant'"  adaptation  to  existing  con- 


198  Fire-Rating  as  a  Science 

ditions.  This  property  in  rates  is  obtained  by  the  simple  expedi- 
ent of  classifying  every  risk  in  our  printed  local  tariffs,  as  a  means 
of  issuing  instructions  to  agents  singly  or  en  masse  in  the  rate 
modifications,  necessitated  by  experience,  an  expedient  similar 
to  that  which  enables  the  military  commander  to  move  his  army 
by  companies,  battalions,  regiments,  and  brigades,  and  without 
which  his  army  would  be  a  mob. 

In  the  light  of  a  premise  which  no  man  of  science  would  ques- 
tion, in  the  light  of  a  fundamental  generalization  defining  the 
phenomena  with  which  it  is  concerned  as  a  specific  manifestation 
of  the  all-pervading  law  of  rhythm  known  as  the  loss  wave,  and 
in  the  light  of  a  symbolic  language  which  reveals  relations  among 
these  phenomena  which  have  all  these  years  lain  perdu  in  the 
bramble-patch  of  our  statistics,  there  is  not  only  no  room  to 
doubt  that  the  activity  of  fire-rating  possesses  the  potentialities 
of  a  science,  but  no  room  to  believe  that  these  potentialities  can 
be  realized  through  any  chain  of  reasoning  that  does  not  start 
from  fundamental  principles  established  by  science  itself. 

Admitting  this  conclusion,  however,  does  not  change  the  fact 
that  every  applied  science  has  its  distinct  utilitarian  aims  and 
predestined  limitations.  Chronology  establishes  a  second  as  the 
unit  of  time,  because  it  answers  its  needs  as  a  science,  in  the  daily 
lives  of  humanity  at  large,  but,  as  has  been  said,  a  second  is 
almost  an  eternity  in  comparison  with  instantaneousness.  Acous- 
tics measures  time  into  thirty  odd  thousandths  of  a  second,  but 
here  its  quantitative  measurement  stops  because  it  has  reached 
the  limit  of  the  differentiating  capacity  of  the  human  ear,  but 
optics  must  measure  time  in  quantities  less  than  one  seven-hun- 
dred-trillionth  of  a  second  before  it  reaches  the  borderland  of 
sight.  On  the  other  hand,  it  suffices  astronomy  in  its  grosser 
measurements,  to  adopt  the  diameter  of  the  earth's  orbit  as  its 
unit  in  estimating  star  distances.  Meteorology  and  seismology 
can  forecast  storms  and  earthquakes  only  a  short  distance  in  the 
future,  and  within  broad  geographical  limits,  but  as  regards  the 
probable  violence  of  these  disturbances  prevision  is  extremely 
indefinite,  nevertheless,  meteorology  as  a  science  is  vastly 
superior  in  its  forecasts  to  the  predictions  of  Poor  Richard's 
almanac;  in  fact,  to-day  it  1s  one  of  the  most  useful  sciences 


Summary  199 

in  conserving  life  and  property.  So  fire-rating  as  a  science 
must  always  be  a  science  of  indefinite  prevision  in  the  con- 
crete, while  it  possesses  the  possibilities  of  an  exact  physical 
science  in  its  ability  to  measure  from  fixed  standards  the  sequen- 
tial motion  of  loss  waves  in  established  property  groups  located 
within  given  territorial  limits,  either  singly  or  collectively.  It 
can  observe  and  establish  generalizations  and  differentiate  and 
apply  quantitative  measurement  to  relations  among  the  phenom- 
ena found  in  the  waves  with  which  it  is  concerned  as  accurately 
as  acoustics  and  optics  can  measure  the  atmospheric  and  etheric 
waves  with  which  they  have  to  do.  It  can  estimate  the  excesses 
in  waves  of  fire  destruction,  and  transmute  them  into  rate  waves 
harmless  to  its  patrons,  according  to  the  dictates  of  judgment 
and  equity,  instead  of  by  haphazard,  and  this  is  the  real  utili- 
tarian end  of  fire-rating  as  a  science,  as  it  is  also  its  natural  limi- 
tation, for  it  can  establish  quantitative  relations  among  the 
charges,  credits,  basis  rates,  and  exposures  of  specific  risks,  only 
through  expert  estimate.  Except  in  their  relational  sense,  how- 
ever, these  factors  which  make  up  the  individual  rate  are  practi- 
cally no  more  important  to  the  individual  owner,  than  that 
chronometers  should  measure  time  into  units  smaller  than  the 
second  for  the  daily  needs  of  people  who  wish  to  catch  a  train, 
or  know  the  dinner  hour.  Science  can  no  more  analyze  and 
measure  the  laws  of  causation  in  the  atoms  which  build  up  the 
individual  rate  molecule,  than  the  signal  service  forecaster  can 
tell  what  will  be  the  specific  damages  resulting  from  an  atmos- 
pheric disturbance  traveling  eastward  in  North  Dakota,  to  the 
gable  end  of  John  Doe's  barn  in  Attica,  Indiana,  but  the  value 
of  fire-rating  as  a  science  is  no  more  disturbed  than  the  value  of 
the  weather  forecasting  science  by  this  fact. 


The  Transition 

Conceding  that  fire-rating  as  a  physical  science  is  feasible, 
and  that  the  change  from  empirical  to  scientific  method  would 
cure  the  evils  inherent  in  present  conditions,  it  is  important  to 
consider  whether  this  change  would  cause  a  train  of  inconven- 
iences which  would  make  the  remedy  worse  than  the  disease.  In 
fine,  granting  that  as  a  science  fire-rating  is  practicable,  would 
the  transition  be  practicable?  f 

Were  it  possible  to  close  our  doors  to  business,  until  we  could 
rerate  the  country  on  a  basis  of  estimated  cost  relations,  the 
problem  would  be  comparatively  simple,  but  this  is  out  of  the 
question — the  change  if  made  must  be  made  without  "suspension 
of  traffic."  It  must  come  through  evolution  aj>d  not  revolution. 
But  the  man  of  expedients  who  prides  himself  on  being  practical, 
will  say.  Something  must  be  done  at  once.  We  cannot  wait  for- 
ever for  theories.  Granting  this,  it  is  proper  to  inquire  what  the 
man  of  expedients  himself  can  do,  in  view  of  the  wholesale  cor- 
raling  of  his  expedients  during  recent  years  by  state  authorities. 
He  might,  it  is  true,  repeat  the  experiment  of  a  horizontal 
advance  throughout  the  country  as  he  did  in  1893,  but  this 
venerable  expedient  has  been  tried  and  found  wanting.  The 
practical  man  is  at  last  constrained  to  admit  this  himself,  in  the  face 
of  the  unanswerable  logic  of  ousters,  fines,  and  county  jails.  Or 
he  might  investigate  the  present  relations  of  rates  to  cost,  deter- 
mine as  best  he  could  what  classes  are  unprofitable,  and  in  what 
degree  and  where,  and  then  make  new  basis  schedules  from  which 
to  reconstruct  local  tariffs  of  the  old  rigid  pattern  in  two  score 
states,  then  set  up  these  tariffs  to  be  again  broken  because  they 
will  not  bend.  In  other  words,  the  self-styled  practical  man,  with 
all  his  fertility  of  expedient  has  but  one  expedient  left,  and  that 
is  to  emulate  the  patient  pismire  and  rebuild  his  frail  structure 
of  rates,  tariff  by  tariff  and  risk  by  risk,  to  be  again  trodden 
under  foot  by  man,  or  triturated  out  of  existence  by  the  elements. 


The  Transition  201 

Admitting,  however,  that"  this  would  be  tolerated  by  public 
sentiment,  it  would  necessitate  another  period  of  expense  and 
demoralization,  with  the  certainty  of  another  debacle  at  the  end. 
Turn  which  way  he  may,  the  man  of  expedients  is  confronted 
with  an  impasse. 

Change  in  any  industrial  activity  means  more  or  less  tempo- 
rary inconvenience,  and  in  confronting  the  unavoidable  results 
of  an  inevitable  change,  the  question  is  to  secure  as  a  quid  pro 
quo  something  that  will  effect  a  permanent  cure  of  the  evils  which 
make  the  change  necessary.  The  practical  man  just  now  is  con- 
templating new  basis  schedules.  Scientific  rating  demands  the 
same.  When  the  practical  man  has  made  his  basis  schedules  he 
will  have  to  utilize  them  in  constructing  local  tariffs.  Scientific 
rating  must  do  the  same  with  its  cost  estimates,  so  that  in  the 
matter  of  time,  expense,  temporary  confusion,  and  all  that  sort 
of  thing,  science  asks  nothing  that  is  not  demanded  by  empiri- 
cism, except  that  science  would  require  that  local  tariffs  show 
the  class  number  opposite  the  cost  estimate  of  each  risk  in 
order  that  every  rate  change  in  future  might  not  destroy  its 
printed  estimate.  This  necessity  would  cause  neither  expense 
nor  delay,  hence,  from  whatever  point  of  view  we  take,  "the 
practical  man"  has  no  practical  advantage  to  offer  in  his  persistent 
refusal  to  recognize  the  scientific  necessity  for  fixed  standards  in  all 
measurement. 

But  can  cost  estimates  be  introduced  gradually  and  mixed  in 
with  local  tariffs,  and  used  contemporaneously  with  ordinary  rates 
without  breeding  confusion  during  the  period  of  change  from  the 
old  to  the  new?  This  is  the  real  question  on  which  hinges  the 
possibility  of  change  from  empirical  to  scientific  rating  without 
a  period  of  upheaval,  and  this  question  is  solved,  not  by  an 
expedient  or  scheme,  but  by  two  necessities  inherent  in  the 
generalization  from  which  scientific  rating  must  start.  The  first 
of  these  is  the  necessity  that  the  class  number  of  each  risk 
shall  appear  in  tariff,  and  the  second  in  the  fact  that  scientific 
rating  must  be  founded  upon  a  system  of  coexistent  tariff  rela- 
tions as  an  unchanging  standard  for  the  measurement  of  sequential 
relations. 

In  the  past,  rates  have  been  percentages  of  each  one  hundred 


202  Fire-Rating  as  a  Science 

dollars  at  risk,  instead  of  each  thousand  dollars  as  with  the  life 
companies.  This  has  made  the  unit  of  measurement  of  premium 
so  small  that  a  fraction  of  a  cent  dropped  in  a  percentage  change 
of  rate,  often  becomes  large  enough  in  the  premium  to  enable 
a  shrewd  agent  to  capture  a  risk  through  manipulation  of  the 
dropped  fraction.  When  we  come  to  the  small  charges  which 
make  up  the  rate  (amounting  in  many  cases  to  but  a  few  cents) 
percentage  changes  become  impracticable. 

If  cost  estimates  are  adopted  in  lieu  of  rate  estimates,  there 
is  a  logical  necessity  for  basing  them  upon  amount  at  risk  instead 
of  upon  the  shifting  and  deceptive  ratio  of  a  ratio  which  exists  in 
the  relations  between  losses  and  premiums.  If  based  upon  one 
thousand  dollars  at  risk,  each  estimate  would  admit  of  exact 
percentage  change,  and  two  agents  figuring  the  same  percentage 
of  profit  for  the  same  risk  could  not  reach  materially  different 
results. 

In  the  face  of  these  necessities  it  follows  that  cost  estimates 
appearing  in  tariffs  along  with  ordinary  rates  would  have  two 
distinct  ear-marks;  one  in  their  class  number  and  the  other  in 
the  fact  that  the  estimate  would  be  based  upon  one  thousand 
instead  of  one  hundred  dollars  at  risk.  These  ear-marks  would 
make  cost  estimates  distinguishable  from  ordinary  rates  at  a 
glance.  With  the  understanding  that  these  estimates  should 
remain  unchanged,  except  for  actual  change  in  hazard,  and  the 
further  understanding  that  whether  written  at  more  or  less  than 
cost,  the  premium  would  invariably  be  based  upon  percentage 
modifications  of  cost  estimates  as  directed  by  the  companies,  it 
would  be  possible  for  these  estimates  to  appear  in  the  same  tariff 
with  rates,  without  the  slightest  chance  of  mixture  or  confusion, 
and  it  would  become  practicable  to  formulate  basis  schedules  of 
estimated  cost  relations  and  apply  them  in  local  ratings  by  risks, 
classes,  towns,  or  states  at  our  convenience  or  pleasure.  Assum- 
ing, for  example,  it  were  decided  to  apply  these  estimates  first  to 
the  flouring-mill  class.  The  fact  would  be  a  matter  of  common 
knowledge  among  fire  underwriters,  and  everybody  would  know 
that  flour-mill  rates  were  to  be  controlled  thereafter  by  percent- 
age changes  from  the  cost  estimates  appearing  in  tariff.     Each 


The  Transition 


203 


company  would  announce  to  its  agents  that  it  would  write  flouring 
mills  at  such  percentage  of  profit  as  might  be  determined  by  its  own 
judgment,  or  by  concerted  action  (where  not  prohibited  by  law). 
After  a  dozen  of  the  leading  classes  had  been  thus  rated  by  cost 
estimates,  we  would  for  practical  purposes  have  all  business  rated 
on  the  new  basis  and  properly  classified  in  our  tariffs.  Every  town 
needing  a  rerating  would  naturally  be  rated  by  cost  estimates  in 
order  to  obtain  flexible  conditions,  in  lieu  of  rate  suspensions, 
to  meet  demoralized  conditions,  and  probably  before  we  fairly 
realized  the  fact,  the  entire  country  would  be  rated  upon  the  cost 
basis.  In  the  meantime,  it  would  be  necessary  to  make  rate 
changes  by  judgment  alone  as  we  have  done  in  the  past,  with  the 
important  difference  that  these  changes  could  be  made  system- 
atically, promptly,  and  last,  but  not  least,  without  injury  to  our 
estitnates.  By  this  time,  however,  the  companies  finding  the 
entire  country  rated  and  classed  by  a  uniform  classification 
different  from  their  own,  could  not  fail  to  see  the  advantages  of 
making  their  individual  lists  conform  to  the  classification  by 
which  their  business  was  rated,  in  order  to  secure  economy, 
uniformity,  and  reliability  in  their  own  classifications.  With 
this  change  in  the  individual  classifications  of  the  companies 
to  conform  to  the  uniform  classification  found  in  tariffs,  would 
come  the  ability  on  the  part  of  the  companies  adopting  this 
classification  to  combine  their  aggregate  experience  as  a  basis 
for  the  statistical  control  of  rates. 

Our  present  local  tariffs  seldom  last  longer  than  five  years, 
when  changes  necessitate  a  new  tariff,  and  it  may  be  assumed 
that,  within  this  time,  rating  as  a  science  would  be  on  its  feet. 
After  the  first  year  the  advantages  of  the  change  would  probably 
be  so  obvious  that  the  work  would  be  pushed  to  a  finish  within  a 
year  or  two  at  most.  By  thus  making  a  path  of  least  resistance 
leading  toward  right  methods,  fire  insurance  would  effect  the  most 
important  change  in  its  history,  through  the  imperceptible  elimi- 
nation of  dead  tissue,  and  assimilation  of  live  tissue  which  accom- 
panies all  healthy  growth. 

It  would  be  difficult  to  find  any  form  of  human  activity  that 
in  adapting  itself  to  its  shifting  environments  is  not  continuously 


204  Flre-Ratlng  as  a  Science 

undergoing  changes  which  involve  greater  hardship  than  would 
be  encountered  in  transforming  fire-rating  from  an  empirical  to  a 
scientific  activity,  but  it  does  not  follow  that  when  the  change  has 
been  accomplished  fire  underwriters  would  be  able  to  rest  upon 
their  oars  through  another  period  of  arrested  development, 
for  science  means  growth,  progress,  finer  distinctions,  nicer 
quantifications  evermore. 


Nota   Bene 

The  processes  of  filling  mental  and  dental  cavities  are  not  un- 
like. Both  require  much  hammering,  and  are  accompanied  by- 
nerve  disturbances  and  apprehension  on  the  part  of  the  patient, 
who,  not  infrequently,  in  spite  of  the  logic  of  personal  discomfort 
elects  to  keep  his  cavity — ache  and  all. 

When  science  finds  a  new  idea,  it  always  requires  much  ham- 
mering to  give  it  permanent  lodgment,  for  Mind,  unlike  Nature, 
does  not  abhor  a  vacuum.  At  the  risk  of  iteration,  it  seems 
proper  to  add  a  final  word,  vitally  important,  because  it  has  to  do 
with  our  subject  from  its  most  practical  aspect. 

Heretofore,  a  seemingly  impassable  barrier  in  the  way  of 
a  change  to  scientific  fire-rating  has  existed  in  the  prevalent  idea 
that  the  first  step  in  this  change  would  be  to  secure  the  consent 
of  the  companies  to  maintain  uniform  and  combined  classifica- 
tion. Experience  has  shown  that  many  companies  are  as  yet  far 
from  ready  to  do  this.  If  science  reveals  that  this  is  not  neces- 
sary as  a  preliminary,  and  that  in  other  respects  the  change  to 
scientific  method  requires  nothing  essentially  different,  so  far 
as  difficulty  is  concerned,  from  the  necessity  for  a  general  rerat- 
ing  which  is  admitted  by  everybody,  the  most  serious  obstacle 
vanishes.  From  this  standpoint  perhaps  the  most  important 
message  delivered  to  us  by  pure  science  lies  in  its  definition  of 
standards.  This  definition  informs  us  that  all  measurement  must 
be  by  comparison  with  a  standard,  that  this  standard  must  be 
a  constant  quantity,  and  that  the  standard  itself  need  not  be 
measured  because  it  precedes  measurement.  It  must  be  a  thing 
arbitrarily  selected  by  common  sense  as  the  most  convenient  and 
reliable  thing  to  measure  with. 

In  fire-rating,  we  are  called  upon  to  measure  the  fluctuations 
in  a  series  of  ratios  or  relations  which  constitute  a  form  of  wave 
motion,  and  as  in  all  other  measurement,  we  must  use  a  fixed 
standard  which,  itself,  "is  not  the  thing  measured  but  the  measur- 

205 


2o6  Fire-Rating  as  a  Science 

ing  rod."  In  measuring  the  sequential  relations  found  in  wave 
motion,  our  standard  must  be  the  coexistent  relations  established 
by  our  tariffs.  These  tariff  standards,  like  all  standards,  precede 
measurement.  They  are  the  measuring  rod  and  not  the  thing 
measured,  and  any  attempt  to  utilize  statistics  in  measuring  these 
tariffs,  whose  functions  are  to  measure  and  not  be  measured, 
must  be  unscientific.  To  attempt  this  is  as  absurd  as  it  would 
be  in  a  tailor  to  measure  his  tape-line  by  the  standard  of  his 
customer,  instead  of  his  customer  by  the  standard  of  his  tape- 
line.  All  tailors  use  tape  measures,  and  every  tailor  keeps  a  book 
to  record  his  measurements,  but  the  record  book  would  be  use- 
less without  the  tape  measure  as  a  standard.  The  relations 
between  our  tariffs  and  the  individual  classification  lists  kept  by 
companies,  is  not  unlike  that  between  the  tailor's  tape-line  and 
his  book  of  measurements. 

The  fact  that  our  tariffs,  as  a  system  of  simultaneous  relations, 
must  always  be  established  by  estimate,  is  inherent  in  the  nature 
of  standards.  In  making  these  tariffs,  our  task  is  simply  to  make 
the  relations  reasonable  and  then  keep  them  as  fixed  or  constant 
standards  for  the  measurement  of  sequential  relations.  It  follows 
that  to  attempt  to  establish  tariffs  as  fixed  standards  by  exact 
figuring  from  the  statistical  data  in  our  possession  is  to  attempt 
a  thing  not  only  impossible  but  unnecessary.  A  realization  of  this 
important  fact  not  only  absolves  us  from  the  imaginary  necessity 
of  consulting  our  exceedingly  questionable  statistical  data  in 
establishing  a  tariff  system  of  co-existent  relations,  but  points 
out  clearly  the  logic  of  availing  ourselves  of  established  relations 
in  existing  state  tariffs,  which  come  nearest  to  our  national 
average  as  a  whole,  and  then  adopting  these  with  the  frank  admis- 
sion that  they  are  our  standard  or  mean  line,  and  as  necessary  to 
us  as  the  tape-line  to  the  tailor.  With  this  conception  of  the 
scientific  nature  of  standards,  the  perplexing  task  we  have  so 
often  vainly  essayed,  of  measuring  our  measuring  rod,  becomes 
entirely  unnecessary,  and  the  problem  of  formulating  standard 
cost  relations  becomes  simply  a  problem  of  common  sense. 

The  most  important  revelation  found  in  the  definition  of 
standards  undoubtedly  lies  in  the  fact  that  this  definition  suggests 
that  it  is  not  necessary  that  the  companies  adopt  uniform 
classification  as  a  preliminary  to  scientific  rating.     In  seeking  this 


Nota  Bene  207 

in  the  past  as  the  first  step,  we  have  got  the  cart  before  the  horse, 
for  these  classifications  would  be  useless  until  the  country  had 
been  rated  by  an  established  system  of  standard  tariffs  of  cost 
relations.  Uniformity  in  individual  lists  of  companies  would  be 
premature  before  the  statistics  entered  in  their  records  are  based 
upon  standard  cost  estimates.  This  brings  us  to  the  fact  that 
the  only  necessary  working  tools  in  breaking  ground  for  the 
foundation  of  a  science  of  fire-rating  are: 

First — A  system  of  tariffs  established  by  common  sense  for 
use  as  constant  standards. 

Second — A  classification  list  by  which  every  risk  shall  be 
designated  by  its  class  number  in  local  tariffs. 

By  basing  cost  estimates  upon  one  thousand  dollars  at  risk 
instead  of  one  hundred  dollars,  and  printing  the  class  number 
of  each  risk  in  local  tariff,  each  cost  estimate  would  be  un- 
mistakable, and  we  could  proceed  to  apply  these  estimates 
in  future  rating  precisely  as  we  would  proceed  to  apply  new 
rates.  This  would  give  us  flexible  rates,  and  by  the  time  the 
country  had  been  so  rated,  the  advantages  of  adopting  this  clas- 
sification might  be  safely  depended  upon  to  induce  the  companies 
to  fall  into  line  in  the  use  of  uniform  classification  and  in  com- 
bining their  statistics  to  learn  their  average  class  experience. 
In  this  order  of  procedure,  pointed  out  by  science  itself,  we  would 
begin  at  the  foundation  and  build  upward  instead  of  beginning  at 
the  top  and  building  downward. 

It  might  possibly  have  simplified  this  discussion  had  we  used 
the  name  Standard  Rates  instead  of  Cost  Relations,  but  it  would 
have  been  a  misnomer.  By  common  usage  the  word  rate  has 
come  to  mean  our  changeable  selling  price,  and  standard  esti- 
mates of  cost  relations  would  be  neither  selling  price  nor  change- 
able. By  calling  these  estimates  Cost  Relations,  we  not  only 
obtain  a  truer  designation,  but  are  able  to  retain  the  word  Rate 
as  the  name  of  our  selling  price,  the  difference  between  Cost 
and  Rate  being  the  index  of  the  ratio  of  underwriting  profit. 
On  the  whole,  the  term  Estimated  Cost  Relations  serves  to 
designate  coexistent  relations  for  what  they  are,  i.  e.  fixed 
standards  of  measurement  for  establishing  our  income  by  com- 
parison with  constant  quantities  that  answer  to  the  definition 
furnished  by  science  itself  as  to  what  constitutes  a  standard. 


Conclusion 

In  concluding  this  protracted  inquiry,  we  are  compelled  to 
admit  that  fire-rating  in  its  broader  aspects  is  not  a  simple  matter; 
that  as  a  science  it  embodies  more  important  and  more  intricate 
problems  than  the  mere  reconstruction,  by  slap-dash  estimate,  of 
basis  tariffs  as  fast  as  they  are  knocked  over  by  legislation  and 
competition.  It  is,  perhaps,  nothing  to  the  discredit  of  the  aver- 
age fire  insurance  official  that  he  knows  as  little  of  fire-rating,  as 
a  science,  as  the  life  insurance  official  knows  of  the  actuarial 
science  on  which  life  insurance  is  founded,  or  the  average  mer- 
chant of  the  science  of  accounting,  without  which  commerce 
would  be  a  tu'penny  affair.  The  average  managerial  function  in 
the  past,  as  it  probably  always  will  be  in  the  future,  is  to  earn 
dividends  satisfactory  to  stock-holders  out  of  established  rates, 
be  they  what  they  may.  The  making  of  these  rates  is  a  separate 
and  distinct  activity,  which  ought  to  be  a  science;  an  activity 
for  which  practical  underwriters  have  neither  leisure  nor  neces- 
sary training. 

Interdicted  from  establishing  uniform  rates  ourselves,  the 
work  of  rating  during  recent  years  has  passed  into  the  hands  of 
professional  raters.  Under  a  system  which  has  never  recognized 
the  scientific  necessity  for  standards,  the  professional  rater  is 
expected  to  make  marketable  bricks  without  straw.  In  the 
absence  of  actuarial  possibilities  he  is  forced  before  the  public  in 
the  suspicious  attitude  of  one  naming  a  common  selling  price, 
and  while  to  us  his  voice  may  be  the  voice  of  Jacob  to  the  pur- 
blind public  his  hands  are  the  hands  of  Esau.  Under  the  circum- 
stances it  is  not  surprising  that  the  constituted  authorities  in  state 
after  state  are  enacting  codes  of  outlawry  against  the  profes- 
sional rater  as  the  minion  of  a  trust. 

During  the  era  of  the  professional  rater,  the  younger  genera- 
tion of  fire  underwriters  has  had  so  little  opportunity  to  exercise 
itself  in  the  work  of  rating,  crude  as  it  has  been,  that  to-day  it 

208 


Conclusion  209 

may  be  said  to  have  become  a  lost  art  with  fire  underwriters. 
Meanwhile  the  independent  rater — the  servant  alike  of  agents, 
companies,  and  Ihe  public — has  been  compelled  to  apply  his  basis 
tariffs  as  faithfully  as  he  could  in  view  of  the  exactions  of  his 
numerous  masters,  with  the  result  that  the  one  capable  of  raising 
the  largest  amount  of  Hades  has  been  usually  mollified  with  the 
most  liberal  concession.  Under  the  grind  of  his  daily  toil,  the 
independent  rater  has  had  no  opportunity  for  analytic  or  synthetic 
study  of  the  phenomena  with  which  he  has  dealt,  and  even  with 
both  opportunity  and  capacity,  he  could  have  taken  no  more 
certain  way  to  cut  off  his  income  than  to  suggest  a  new  idea 
involving  the  necessity  for  any  material  departure  from  prece- 
dent. Under  these  conditions,  maintained  year  after  year,  rates 
have  slowly  but  surely  drifted  into  "Tohu-ba-Bohuland,  the 
unruly  chaos  where  event  stumbles  after  event,  and  change 
jostles  change  without  sequence  and  without  law."  To-day  we 
have  admittedly  lost  our  bearings,  and  sundry  and  divers  com- 
mittees, aided  by  the  insurance  press,  have  turned  bell-ringers, 
and  are  crying  out  on  the  highways  for  information  as  to-  the 
whereabouts  of  our  lost,  strayed,  or  stolen  rates,  to  the  edifica- 
tion of  the  public  which  has  done  so  much  to  help  us  lose  them. 
It  must  be  confessed  that  fire-rates  have  not  the  homing  instinct 
of  Little  Bo-Peep's  sheep,  and  it  is  hopeless  to  expect  that,  if  we 
"let  them  alone,  they  will  come  home  a' wagging  their  tails  behind 
them." 

By  general  consent  fire-rates  are  astray.  Such  system  as  we 
have  had,  has  been  turned  topsy-turvy,  and  everyone  insists  that 
something  must  be  done.  The  phraseologists  are  busy  in  the 
manufacture  of  verbal  panaceas.  "No  more  flat  advances," 
"schedule-rating,"  "class  equalization,"  "justice  to  the  pub- 
lic," are  the  catchwords  of  the  hour,  and  no  one  seems  to  realize 
that  these  and  other  euphemisms,  if  they  have  any  definite  mean- 
ing, imply  the  necessity  for  a  science  of  fire-rating.  But  back  of 
this  foreground  of  perplexity  stands  grim  Authority  ready  to 
inflict  the  penalties  of  the  law  for  the  slightest  symptom  of  con- 
certed action,  and  in  every  tree-top  roosts  an  incorporate  buzzard 
ready  for  another  gorge  upon  our  lost  rates  when  they  have  been 
found  and  properly  fattened.    It  must  be  confessed  that  it  is  hard 


2IO  Fire-Rating  as  a  Science 

to  see  the  sun  through  all  the  dust  aroused  by  self-interest,  but 
it  does  not  follow  that  there  is  no  such  thing  as  blue  sky  and 
God's  sunshine  above  the  dust  clouds  we  have  helped  to  kick  up. 
In  its  final  analysis,  science  is  simply  a  search  for  truth  in  the 
right  way,  and  all  human  history  shows  that  human  laws  based 
upon  error  cannot  stand  before  natural  laws  based  upon  truth. 
It  has  not  been  many  centuries  since  teachers  were  forbidden  to 
instruct  their  pupils  regarding  the  facts  revealed  by  the  telescope; 
since  mathematics  was  declared  to  be  the  source  of  all  heresies; 
geometry  an  institution  of  the  devil ;  chemistry  one  of  the  seven 
devilish  arts,  and  the  study  of  physics,  a  statutory  crime.  At  the 
beginning  of  the  present  century,  fanning-mills  for  winnowing 
grain  were  denounced  as  an  institution  of  Satan,  "Prince  of  the 
powers  of  the  air,"  and  a  violation  of  the  text,  "The  wind 
bloweth  where  it  listeth. "  Many  people  still  in  the  youth  of  old 
age  can  recall  the  hue  and  cry  against  the  use  of  anaesthetics, 
because  "pain  is  God-given. "  It  has  hardly  been  two  score  years 
since  the  constituted  authorities  forbade  the  Scientific  Congress 
of  Italy  to  meet  at  Bologna.  A  little  further  back  we  find  that 
lawyers  were  regarded  with  almost  universal  distrust.  Further 
back,  doctors  were  in  equally  bad  odor  and  were  generally  for- 
bidden to  practice  their  art,  and  if  we  go  back  to  pagan  days, 
merchants  were  so  generally  distrusted  that  they  were  assigned 
the  same  God  with  thieves.  The  present  prejudice  against  fire 
insurance  is  doubtless  in  large  measure  the  result  of  its  being  one 
of  the  youngest  in  the  sisterhood  of  human  activities,  and  this 
prejudice  is  increased  in  certain  states  because  of  the  tremendous 
waves  in  loss  ratio,  which  keep  the  industry  in  constant  and 
unpleasant  evidence  before  the  public.  The  "wild-and-woolly" 
legislation  of  some  states  is  simply  another  manifestation  of 
prejudice  against  everything  affecting  public  welfare  that  is  not 
understood  by  the  public  mind.  Fire  underwriters  cannot  con- 
sistently condemn  the  public  for  this  distrust  of  things  beyond 
popular  comprehension,  for  they,  too,  have  long  manifested  pre- 
cisely the  same  spirit  in  resisting  "suspicious  novelties"  and 
"questionable  innovations."  These  things  simply  prove  the 
truth  of  the  epigram,  "There  is  no  pain  equal  to  the  pain  of  a  new 
idea."     Back  of  this  resistance  to  progress  lies  the  soul  of  good, 


Conclusion  21 1 

found  in  most  things  called  evil — an  earnest  desire  for  what  seems 
under  a  mistaken  notion  to  be  right.  It  is  a  law  of  nature  that 
there  can  be  no  permanent  progress  where  there  is  no  resistance. 
The  present  efforts  of  the  authorities  to  destroy  law  and  order 
in  our  industry  are  an  omen  of  progress  to  come,  for  it  is  only 
under  the  stimulus  of  opposition  that  men's  minds  are  fitted  for 
the  task  of  grappling  complicated  problems.  It  is  claimed  that 
if  slavery  had  never  existed,  the  human  mind  would  never  have 
become  capable  of  continued  concentration ;  that  we  have  emerged 
from  savagery  because  slaves  through  countless  generations  were 
compelled  to  concentrate  their  thoughts  upon  assigned  tasks.  If 
true,  this  shows  that  slavery,  bad  as  it  was,  was  simply  a  phase 
of  human  progress,  a  step  upwards  from  cannibalism.  The  pricks 
and  goads  of  populistic  legislation  are  the  appetizers,  without 
which,  in  all  probability,  we  should  never  have  been  able  to  break 
our  cake  of  custom.  In  England,  where  fire  insurance  has  been 
unmolested  by  legislation,  there  has  been  no  publication  of  statis- 
tics, and  neither  underwriters  nor  the  public  have  any  information 
as  to  aggregate  results.  In  Eastern  states,  where  fire  underwriters 
have  been  comparatively  free  from  legislative  exactions,  they 
have  been  unable  during  the  past  quarter  of  a  century  to  reach 
the  stage  of  progress  found  in  general  associations  for  the  regu- 
lation of  commissions.  On  the  other  hand,  under  the  constant 
stimulus  of  legislative  exactions,  fire  underwriters  in  the  Western 
and  Southern  states  have  been  driven  into  active  and  comparatively 
harmonious  co-operation,  not  only  as  to  rates,  but  as  to  expenses. 
Their  ideas  have  been  expanded  to  this  extent  by  the  educational 
process  of  constant  antagonistic  forces,  for  in  the  effort  to  adapt 
themselves  to  their  environments,  they  have  been  compelled  to 
resort  to  experimentation,  and  experimentation  means  advance. 
Viewed  from  a  humanitarian  standpoint,  the  difference  between 
present  fire  underwriting  ideals  in  America  and  England,  or  for 
that  matter  Europe,  is  the  difference  between  progress  and  stag- 
nation, and  this  is  said  in  full  recognition  of  the  fact  that  in  a 
commercialistic  sense  American  underwriters  have  much  to  learn 
from  their  brethren  across  the  water.  The  human  mind,  like  the 
human  back,  becomes  fitted  to  its  burdens;  and  in  the  populistic 
states,  underwriters,  like  the  unwilling  school-boy  whipped  to 


212  Fire-Rating  as  a  Science 

school,  have  been  educated  by  the  logic  of  illogical  events  into 
more  tolerant  and  progressive  views.  Like  Rabelais  they  have 
been  forced  to  the  conclusion  that: 

"  It  is  wise  to  get  knowledge  and  learning  from  every  source — from  a 
sot,  a  pot,  a  fool,  a  winter  mitten,  or  an  old  slipper." 

It  is  this  stimulus,  resulting  from  public  dissatisfaction,  which 
will  eventually  compel  fire  underwriters  into  an  earnest  search 
for  the  truth  in  the  right  way,  which  is  necessarily  the  scientific 
way;  and,  without  doubt,  this  movement  so  fraught  with  impor- 
tance to  the  future  of  the  industry,  will  originate  in  the  United 
States,  where  the  conflict  between  counter-forces  has  raged  the 
longest  and  hardest.  In  the  face  of  a  determined  public  senti- 
ment, the  first  requisite  is  that  fire  underwriters  must  make  their 
methods  conform  to  law,  natural  and  statutory,  and  this  can  be 
done  only  by  a  search  for  the  truth  in  the  right  way.  Public 
opinion  has  demanded  and  enforced  the  publication  of  our  aggre- 
gate experience  each  year  in  each  state.  Any  movement  of  the 
companies  to  ascertain  their  aggregate  experience  by  classes  as 
well  as  by  states  would  be  going  farther  than  the  public  has  yet 
asked.  The  publicity  in  class  statistics  essential  to  fire-rating 
as  a  science  is  the  publicity  exacted  by  law,  only  more  in  detail; 
more  analytical  in  form.  No  existing  law  prohibits  the  com- 
panies from  ascertaining  their  combined  experience  through 
actuarial  estimates  of  coexistent  relations,  not  intended  to  be 
a  combined  price-list,  but  a  basis  of  intelligent  information 
in  which  every  citizen  is  interested.  Such  information  is  not 
interdicted  by  legislation,  and  in  all  probability  never  will  be, 
for  it  is  in  exact  line  with  the  popular  demand  for  "the  truth, 
the  whole  truth,  and  nothing  but  the  truth."  In  states  where 
the  laws  do  not  interfere  there  is  nothing  to  prevent  underwriters 
from  agreeing  upon  reasonable  ratios  of  profit;  and  with  the 
ability  to  equalize  class  rates,  which  we  have  lacked  in  the  past, 
the  ratio  of  specific  class  profit,  fixed  by  competition,  would  be 
so  surprisingly  small  that  no  state  could  reasonably  interfere. 
In  states  where  the  laws  do  interfere,  however,  these  estimated 
cost  relations  based  upon  statistical  data,  would  ultimately  con- 
stitute a  landmark  which  would  command  confidence  and  respect 
on  the  part  of  every  underwriter,  even  without  conference  or 


Conclusion  213 

restraint  other  than  that  dictated  by  common  prudence.  Popular 
opinion  would  soon  crystallize  in  a  sentiment  that  the  selling  of 
indemnity  below  cost  was  a  disgraceful  act,  no  less  inimical  to 
the  public  than  to  the  underwriting  community.  Minimum  rates 
would  establish  themselves  as  surely  as  minimum  prices  establish 
themselves  with  the  merchant  who  knows  the  cost  of  his  goods. 
The  work  of  independent  raters  would  become  purely  statistical. 
It  would  be  no  part  of  their  duty  to  dictate  a  selling  price  to 
companies  and  agents,  or  a  purchasing  price  to  the  public.  Their 
work  would  be  to  determine  actuarially  the  cost  relations  of  the 
thing  sold,  and  it  would  be  for  those  dealing  in  the  thing  to  deter- 
mine their  own  selling  price.  Under  such  conditions,  the  inde- 
pendent rater  would  cease  to  be  like  Figaro,  the  servant  of 
everybody.  He  would  be  free  to  prosecute  his  duties  without 
keeping  a  constant  eye  upon  the  personal  equation,  which  in  the 
past  has  done  so  much  to  disturb  his  work. 

In  the  past,  the  tariff  rate  of  a  risk  has  been  ostensibly  its 
selling  price.  This  necessarily  included  the  three  independent 
elements  of  loss  ratio,  expense  ratio,  and  ratio  of  underwriting 
profit,  but  each  of  these  has  been  a  fluctuating  quantity  moving 
under  an  independent  rhythmic  law  of  its  own,  with  waves  of 
expense  and  underwriting  profit  hardly  less  in  relative  fluctuation 
than  the  wave  of  loss.  By  eliminating  the  element  of  underwriting 
profit  and  agreeing  upon  a  reasonable  maximum  of  expense, 
which  some  day  the  public  will  demand,  the  commission  and 
brokerage  question  would  become  merged  in  the  cut-rate  ques- 
tion, where  it  belongs. 

If  the  fundamental  generalization,  that  fire-rating  as  an  activ- 
ity has  to  do  with  the  modification  of  loss  waves,  a  corollary  from 
this  is  that  as  an  industry  fire  insurance  with  scientific  rating  and 
pliable  rates  would  be  purged  of  the  element  of  chance,  which 
has  been  its  bane  and  reproach  in  the  past,  excepting  so  far  as 
inherent  in  the  mismanagement,  which  makes  chance  an  element 
in  all  commercial  emprise.  Under  the  generalization  stated, 
fire  insurance  would  become  a  clearing  house  for  the  transfer 
of  class  and  state  balances  resulting  from  modified  waves  of 
loss   back   and   forth   between   stock-holder  and   policy-holder, 


214  Fire- Rating  as  a  Science 

through  flexible  rates.  In  so  far  as  chance  is  concerned, 
there  would  be  no  appreciable  difference  between  banks  which 
receive  deposits  from  one  to  loan  to  another,  and  insurance  com- 
panies which  under  scientific  rating  would  house  the  excess  of 
premiums  during  wave  minima  in  order  to  distribute  them  during 
wave  maxima.  The  touchstone  of  success  with  the  fire  company- 
would  lie  in  a  wise  discrimination  in  selection,  economic  manage- 
ment, and  judicious  investments,  rather  than  in  the  qualities 
which  are  supposed  to  achieve  success  upon  the  turf  or  green 
baize.  The  competition  on  the  part  of  non-associated  companies 
has  flourished  in  the  past  upon  inflexible  rates.  As  the  house  fly 
can  light  upon  a  bald  head  and  accomplish  its  purpose  before 
the  brain  beneath,  through  the  complicated  system  of  sensory 
and  motor  nerves,  can  receive  news 'and  "wire  orders"  to  the 
flexor  and  extensor  muscles  when  and  where  to  slap,  so  the  inde- 
pendent company  has  been  able  to  suck  its  fill  before  we  could 
smash  our  cumbrous  rating  machinery,  and  let  loose  fratricidal 
strife  among  our  agents.  Disguise  it  as  we  may,  our  sole  remedy 
for  this  sort  of  competition  has  killed  the  agent  and  amused  the 
fly.  Pliable  rates  would  enable  fire  insurance  to  slap  before  the 
fly  could  unsheathe  its  suction  pump,  and  this  is  the  only  thing 
that  will  command  the  respect  of  flies. 

In  the  light  of  the  foregoing  investigation  of  rating  as  a 
science  one  thing  is  plain:  the  enforced  abandonment  of  tariffs 
which,  after  the  manner  of  trusts,  baldly  state  a  common  and 
inflexible  selling  price  for  all  companies,  would  be  a  blessing  in 
disguise,  for  fire-rating  can  never  become  a  science  under  such  tariffs. 
So  long  as  we  continue  to  use  them,  all  hope  of  scientific  methods 
must  be  abandoned.  On  the  other  hand,  granting  the  necessity 
for  a  general  restoration  of  the  rate  relations  which  have  been 
thrown  into  chaos  by  the  events  of  recent  years,  it  is  surprising 
and  encouraging  to  note  how  little  of  change  is  involved  in  the 
acceptance  of  fire-rating  as  a  potential  science.  The  change  from 
empirical  popular  knowledge  to  exact  scientific  knowledge  is  in 
the  line  of  natural  human  evolution.  It  is  a  change  that  is 
constantly  occurring  in  every  phase  of  human  progress,  a  change 
of  natural  growth,  of  integration  of  live  tissue  and  elimination 


Conclusion  215 

of  dead  tissue.  The  change  from  empirical  rating  to  scientific 
rating  would  in  the  same  manner  be  in  the  line  of  a  natural 
growth  upon  such  of  system  as  has  been  evolved  by  combined 
underwriting  intelligence  in  the  past;  a  growth  that  would 
result  easily  and  naturally  the  moment  we  remove  the  trammels 
set  by  conventionalism  and  selfishness. 

All  science,  theoretical  and  applied,  must  avail  itself  of  arbi- 
trary standards  in  order  to  apply  quantitative  measurement.  In 
fire-rating  as  a  science,  numerous  standards  for  various  purposes 
are  essential.  Most  of  these  standards  have  been  already  estab- 
lished by  average  intelligence,  even  if  with  indefinite  value. 
Our  A,  B,  C  and  D  buildings,  our  fire  departments  of  first, 
second,  third,  and  fourth  class,  our  preferred  and  non-preferred, 
non-hazardous,  hazardous,  and  extra  hazardous  stocks  are  all 
classified  standards  loosely  defined.  That  these  standards  under 
scientific  method  will  increase  in  number,  and  become  more 
definite,  with  finer  shades  of  distinction,  cannot  be  doubted,  for 
* 'progress  toward  higher  complexity  and  higher  organization  is 
a  law  that  holds  good  of  processes  as  well  as  things,  and  the 
greater  the  amount  of  progress,  the  more  rapidly  must  progress 
go  on."  The  classified  experience  of  all  companies  is  not  essen- 
tial to  practical  results;  on  the  contrary,  the  experience  of  some 
companies  would  be  positively  detrimental  to  the  reliability  of 
statistics.  Nor  need  scientific  rating  be  established  everywhere 
at  once.  It  can  be  started  tentatively,  class  by  class,  or  state 
by  state.  No  science  ever  came  into  existence  like  Minerva,  full 
grown  and  panoplied.  The  search  for  truth  is  necessarily  a  slow 
search,  for  the  least  error  necessitates  the  return  to  an  established 
fact,  and  a  retracing  up  to  the  point  of  divergence  from  the  right 
path.  Right  thinking  moves  forward  by  slow  stages  of  experi- 
mentation and  revision.  Many  sciences  which  began  with  the 
dawn  of  civilization  are  still  instinct  with  progress,  each  pausing 
from  time  to  time  to  await  the  expansion  of  human  intelligence, 
or  the  aid  of  another  science  to  point  out  the  way.  There  is  a 
world  of  room  for  research  in  fire-rating,  if  we  once  set  out  in 
quest  of  Truth,  but  we  can  never  find  her  by  looking  for  fixity  in 
a  pulsating  universe,  or  by  trying  to  change  coexistent  relations 


2 1 6  Fire-Rating  as  a  Science 

into  sequential  relations,  or  by  dealing  with  fluids  by  the  law  of 
solids,  or  by  trying  to  change  space  into  time. 

It  was  preordained  that  the  harmonies  of  Cosmos  should  be 
modulated  from  the  elemental  crash  of  force  and  resistance,  and 
the  same  Will  that  resolved  universal  chaos  into  universal  rhythm 
bequeathed  to  man  the  message  of  the  ages,  "The  truth  shall 
make  you  free." 


APPENDIX 


External  Exposures 


The  external  exposure  charge  is  the  pons  asinorum  of  the  fire- 
rater.  Apparently  defying  all  attempts  at  quantitative  analysis 
it  has  been  in  a  large  measure  left  to  guesswork.  No  study  of 
fire-rating  as  a  science  can  ignore  this  illusive  but  important 
factor.  In  thousands  of  risks  the  hazard  arising  from  exterior 
exposure  is  larger  than  the  inherent  hazard  of  the  risk  itself,  and 
after  the  most  careful  synthesis  of  basis  rate,  charges  and  credits  in 
establishing  a  rate,  we  are  often  forced  into  the  absurd  expedient 
of  ** lumping"  an  exposure  charge  which  may  be  three  or  four 
times  as  much  as  the  unexposed  rate  of  the  risk  itself. 

In  other  charges  appearing  in  basis  tariffs  it  is  possible  to 
preserve  at  least  reasonably  true  relations,  but  hardly  any  two 
risks  are  similarly  affected  by  the  same  exposure  hazard,  for  as 
in  gunnery  we  must  take  into  quantitative  account  the  range  and 
dynamics  of  the  attacking  exposure  both  as  to  structure  and  con- 
tents as  well  as  the  statical  resistance  of  the  exposed  structure 
and  contents,  along  with  the  retreating  ability  found  in  all 
removable  property.  What  may  be  a  heavy  exposure  to  one  risk 
may  be  an  unimportant  exposure  to  another. 

Again,  it  is  impossible  to  determine  where  exterior  exposure 
ends,  for  we  must  reckon  not  only  with  the  nearest  exposure,  but 
with  the  accumulated  hazard  resulting  from  the  exposure  of  expo- 
sures by  other  exposures.  In  the  great  Chicago  fire  it  was  con- 
clusively demonstrated  that  every  building  in  the  city  was  exposed 
by  Mrs.  O'Leary's  barn,  and  it  may  be  stated  as  a  generalization 
that  in  every  city  and  town,  every  structure  is  in  some  degree 
exposed  by  every  other  structure  within  corporate  limits. 

With  factors  of  causation  so  numerous  and  mutually  impli- 
cated, it  is,  of  course,  useless  to  attempt  to  trace  back  every 
remote  cause  to  its  source  and  establish  its  quantitative  relations. 
Finite  powers  can  never  work  out  an  equation  so  nearly  infinite, 
but  even  in  the  problem  of  exposure,  the  common  sense  of  fire 

iii 


iv  Appendix 

insurance  has  untangled   from  the  vast  plexus  of    causation  a 
number  of  strictly  logical  inferences. 

In  order  to  understand  the  equities  of  the  distribution  of 
exposure,  it  is  proper  to  revert  once  more  to  our  definition  of  the 
word  basis  rate,  as  the  residuum  of  unanalyzed  or  at  least  unap- 
praised  hazard.  This  residuum  if  crudely  dissected  will  be  found 
to  be  composed  largely  of  the  following  elements: 

1.  The  surplus  indemnity  secured  for  nothing  by  large  property  owners 
through  evasion  of  the  spirit  of  co-insurance. 

2.  Personal  influences  which,  because  unanalyzable,  must  be  distributed 
among  all  policy-holders. 

3.  The  residuum  of  external  exposure  which  escapes  appraisement 
under  our  present  methods  of  reckoning  exposure  charges. 

If  we  regard  the  basis  rate  as  a  receptacle  into  which  we 
throw  everything  we  cannot  quantitatively  estimate,  the  logic 
of  throwing  into  this  receptacle  the  residuum  of  exposure  result- 
ing from  remote  causes,  which  cannot  be  analyzed  or  estimated, 
becomes  evident.  On  a  rough  estimate  the  entire  premiums  col- 
lected for  exposure  must  be  about  equal  to  the  total  premiums 
collected  for  the  inherent  hazards  of  risks  themselves.  Deduct- 
ing from  existing  basis  rates  the  other  factors  above  enumerated, 
/.  ^.,  property  insured  for  nothing  through  our  inability  to  enforce 
co-insurance,  and  the  aggregate  moral  hazard,  which  has  been 
claimed  to  be  about  twenty-five  per  cent  of  the  total  hazard  of 
all  property,  there  remains  relatively  a  considerable  proportion  of 
this  basis  rate  attributable  to  the  residuum  of  exposure  left  after 
we  have  applied  our  present  exposure  charges,  such  as  they  are. 
While  these  charges  have  evidently  absorbed  a  large  share  of  the 
total  exposure  hazard  of  the  country,  when  we  come  to  examine 
them  in  our  state  tariffs  we  find  an  utter  lack  of  logical  relations. 
In  fine,  exposure  charges,  like  other  charges  in  existing  tariffs, 
are  established  by  quantitative  estimate,  and  the  relative  com- 
plexity of  the  exposure  factor  has  caused  corresponding 
incongruities  in  these  charges.  It  is  not  the  intention  of  this 
investigation  to  discuss  the  formulation  of  basis  tariffs,  because 
the  work  of  tariff  construction  is  simply  the  exercise  of  the  esti- 
mating faculty  in  establishing  coexistent  relations,  and  for  this 
reason  is  not  a  legitimate  subject  of  scientific  inquiry. 


Appendix  v 

It  is  within  the  scope  of  scientific  investigation,  however,  to 
inquire  into  the  possibility  of  establishing  formulae  calculated 
to  distribute  external  exposure  charges  more  exhaustively,  con- 
sistently, and  impartially  than  we  have  been  able  to  do  in  the 
past. 

All  exposures  may  be  divided  into  internal  and  external. 
Many  inconsistencies  in  charges  for  internal  exposures  might  be 
enumerated,  but  they  are  simply  the  errors  in  relation  which  are 
found  in  other  charges.  At  the  worst  they  are  established  charges 
and  as  such  free  from  personal  favoritism,  and  the  inequities, 
such  as  they  may  be,  are  confined  to  a  single  building.  When 
we  come  to  external  exposure,  causation  gets  out  of  doors  and 
stands  ready  to  run  amuck.  For  this  reason  some  method  of 
bringing  about  reasonable  uniformity  and  certainty  in  our 
charges  for  exterior  exposure  becomes  correspondingly  more 
important.  Perhaps  the  secret  of  this  formula  might  be  found 
in  the  mathematical  relations  of  the  cone.  It  is  a  well-known 
fact  that  all  flame  unaffected  by  atmospheric  currents  assumes 
the  shape  of  a  perpendicular  cone,  as  seen  in  the  flames  of  candles 
and  lamps.  (The  shape  of  gas  jets  is  an  exception  to  this, 
because  of  the  shape  of  the  burner  and  pressure  of  the  gas.) 

When  forced  out  of  the  perpendicular  by  an  air  current,  the 
flame  assumes  the  shape  of  a  horizontal  cone  as  seen  when  under 
the  influence  of  a  blow-pipe.  In  fact,  we  use  the  expression  "a 
tongue  of  flame"  to  represent  the  cone-like  shape  found  in  all 
flames.  The  same  phenomenon  may  be  seen  in  a  burning  build- 
ing. The  chances  of  wind  forcing  a  flame  directly  against  a  given 
object  within  a  radius  of  one  hundred  feet  are,  let  us  assume,  as 
one  to  one  hundred.  Allowing  for  prevailing  winds,  this  propor- 
tion would  increase  as  the  distance  diminished  until,  on  a  rough 
estimate,  the  chances  would  be,  let  us  say,  as  one  to  two.  That 
this  is  the  liberal  basis  assumed  in  our  frame  exposure  charges  is 
shown  by  the  fact  that  when  frame  buildings  adjoin,  the  exposure 
charge  added  to  each  in  our  frame  row  tariffs  is  about  fifty  per 
cent  of  the  inherent  rate  of  the  exposing  risk.  Granting  that  this 
exposure  gradually  diminishes  to  a  vanishing  point,  after  the 
manner  of  a  cone,  the  problem  is  to  estimate  the  average  vanish- 
ing point  and  reduce  the  exposure  charge  by  a  descending  scale 


la  Appendix 

until  this  vanishing  point  is  reached.*  That  the  vanishing  point 
varies  with  the  magnitude  and  character  of  the  exposure  is  a 
logical  inference,  and  this  inference  is  carried  out  in  our  tariffs 
which  attempt,  at  times,  to  make  the  vanishing  point  for  exposure 
differ  with  the  size  and  nature  of  the  exposing  hazard.  The  true 
average  vanishing  point,  like  all  other  features  of  tariff  construc- 
tion, is  subject  to  expert  estimate.  We  know  that  fires  are  often 
communicated  by  burning  brands  for  miles,  and  not  infrequently 
by  direct  radiation  for  several  hundred'  feet.  All  these  excep- 
tional results  of  causation,  however,  legitimately  belong  in  the 
residuum  of  unanalyzed  hazard,  which,  under  the  law  of  comity, 
appears  either  in  the  basis  rate  or  in  the  average  rate  increase, 
which  we  have  been  in  the  habit  of  attempting  to  spread  over 
wide  areas  of  time  and  space  after  exceptional  conflagrations. 

In  the  light  of  this  explanation  it  is  obvious  that  our  present 
vanishing  point  which  is  the  width  of  an  ordinary  sixty-foot 
street,  for  ordinary  one  and  two  story  frame  mercantile  build- 
ings, and  one  hundred  feet  for  large  frame  manufacturing  risks 
and  elevators,  is  a  logical,  if  crude,  generalization,  which  enables 
us  to  take  up  a  good  share  of  the  immediate  or  direct  exposure 
hazard  in  regulated  charges,  though  we  have  no  formula  for  reck- 
oning the  increment  of  hazard  resulting  from  secondary  exposures. 

In  working  out  a  generalization  for  exposures,  based  upon  the 
law  of  the  cone,  it  is  of  course  necessary  to  take  into  consider- 
ation the  nature  of  the  wall  of  the  exposed  and  exposing  build- 
ings. An  analysis,  perhaps  sufficiently  accurate  for  practical 
purposes,  has  been  crystallized  by  usage  into  the  following: 

1.  Frame. 

2.  Brick  without  parapet  or  with  openings,  or  exposed  woodwork,  as 
balconies,  awnings,  wood  cornice,  shingle  or  mansard  roof,  also  brick 
veneered  or  iron  clad. 

3.  Brick  wall  solid,  with  parapet,  with  all  openings  closed  by  approved 

doors  or  shutters. 

♦It  is  possible  to  reckon  the  diminishment  of  a  cone,  as  shown  by  its  solid  contents, 
superficies  or  diameter,  or  to  establish  any  desired  ratio  of  diminishment  from  the  approach 
of  its  hyperbola  to  any  given  asymptote.  The  ratio  of  diminishment  found  in  the  isosceles 
triangle,  created  by  the  bisection  of  a  cone,  is,  however,  the  simplest,  and  for  practical 
purposes  probably  the  best,  in  view  of  the  fact  that  simplicity  is  desirable  in  a  calculation 
which  at  most  is  only  intended  to  absorb  in  regulated  charges  as  much  as  possible  of  the 
unknown  quantity  found  in  exterior  exposures.  A  careful  study  of  the  problem  W9uld 
doubtless  reveal  the  possibility  of  calculating  tables  of  exposure  based  upon  the  relations 
of  the  hyperbola  to  different  asymptotes  best  suited  to  different  degrees  of  exposure  in 


size,  materials,  etc.,  under  different  degrees  of  fire  department  protection.  The  following 
formulae,  based  upon  the  isosceles  triangle  as  containing  the  simplest  dimensions  of  the 
cone,  are  purely  suggestive. 


Appendix 


vn 


This  would,  in  theory,  give  nine  possible  combinations  of 
exposure,  as  follows: 

1  by  1  2  by  1  3  by  1 

1  by  2  2  by  2  3  by  2 

I  by  3  2  by  3  3  by  3 

Following  established  usage  we  may  eliminate  the  combina- 
tions printed  in  light  type,  which  would  leave  five  combinations 
for  consideration. 

Taking  for  our  starting  point  the  present  basis  (fifty  per  cent 
of  the  rate  of  exposing  hazard)  as  our  exposure  charge  between 
frames,  and  estimating  the  exposure  of  the  other  combinations 
in  proportion  as  the  hazard  is  less,  we  may  assume  for  our  expo- 
sure charge  where  such  risks  adjoin  each  other, 

1  by  I say  50  per  cent  of  exposing  hazard. 

,         > say  30  per  cent  of  exposing  hazard. 

2  by  2 say  20  per  cent  of  exposing  hazard. 

3  by  I say  10  per  cent  of  exposing  hazard. 

Under  the  law  of  the  cone  these  percentages  would  diminish 
as  the  distance  from  exposure  increased. 

Let  us  suppose  the  vanishing  point  of  exposure  to  be  as 
follows : 

1  by  I 60  feet. 

,  ^      { ___ —40  feet. 

2  by  I  )  ^ 

2  by  2 30  feet. 

3  by  I —20  feet. 

We  would  now  have  four  cones,  or  what  is  the  same,  one  cone 
divided  as  shown  in  the  diagram  below: 

I  by  I  2byl      2by2      3  by  J 


Vlll 


Appendix 


Reckoning  from  the  base  of  each  to  the  apex,  in  proportion 
to  the  increasing  space  between  exposures,  we  would  have  the 
following  results: 

to  apex- --exposure  decreases  Ye  every  lo  feet. 

to  apex- --exposure  decreases  %  every  lo  feet. 

to  apex — exposure  decreases  %  every  lo  feet, 
to  apex- --exposure  decreases  yi  every  lo  feet. 


From  point  i  by  i 
From  point  i  by  2 
From  point  2  by  i 
From  point  2  by  2 
From  point  3  by  i 


From  the  preceding  assumptions  it  is  possible  to  construct  the 
following  table  of  diminishment  in  exposure  charges  for  clear 
spaces  applicable  say  to  buildings  in  unprotected  towns,  and  from 
this  to  construct  special  tables  for  buildings  and  contents  under 
different  grades  of  fire  department  protection. 


Character  of  Risk 
and  Exposure. 

Vanishing  Point. 

Per  cent  of 

Exposure  Charge 

to  Inherent  Rate 

of  Exposure. 

Decrease  of 

Exposure  Charge 

for  Each  Five  Feet 

of  Clear  Space. 

I  by  I 

I  by  2  ) 

60  feet 

40  feet 

30  feet 
20  feet 

50  per  cent 

30  per  cent 

20  per  cent 
10  per  cent 

8^  percent 

12^4.  percent 

16%  percent 
25      per  cent 

2  by  I   5 

2  by  2 

•^  bv  I -- 

The  application  of  the  above  table  might  be  stated  in  the 
following  formula: 

When  more  than  one  exposure  in  a  given  direction^  begin  with  the 
most  remote  exposure  in  block^  not  separated  by  space  in  excess  of  its 
vanishing  point,  reduce  exposure  charge  for  space  and  add  result  to 
exposure  charge  of  next  exposure;  again  reduce  for  space,  and  so  on, 
until  we  come  to  exposed  risk,  then  add  the  accumulated  exposure 
charge  to  basis  rate  of  the  exposed  risk.  When  risk  is  exposed  in 
more  than  one  direction,  proceed  in  the  same  manner  for  each  direction. 

Space  forbids  more  than  a  mere  outlined  suggestion  of  this 
theoretical  formula,  which  is  capable  of  being  elaborated  into 
graded  tables  of  exposure  for  a  closer  classification  of  exposed 
and  exposing  buildings  as  to  size,  structure,  and  hazard,  as  well 
as  for  stocks  and  buildings,  according  to  grade  of  fire  department 
protection.  These  things  will  readily  suggest  themselves  to 
those  familiar  with  practical  rating.  The  principal  feature  for 
consideration  at  present  being  that  the  theory  suggests  the  con- 


Appendix  ix 

struction  of  formulae  adaptable  to  a  wide  variety  of  conditions, 
which  would  enable  us  to  extend  our  analyses  to  secondary  or 
tertiary  exposures,  often  more  important  than  immediate  expo- 
sures. By  so  doing,  we  could  absorb,  in  logically  regulated 
charges,  a  much  larger  proportion  of  the  residuum  of  unanalyzed 
exterior  exposure  hazard  than  we  have  been  able  to  do  in  the 
past.  The  author  has  utilized  this  formula  in  estimating  expo- 
sures for  the  past  twenty  years  with  results  that  have  never  failed 
to  commend  themselves  by  the  logical  exposure  relations  obtained, 
though  he  does  not  question  the  possibility  of  a  more  perfect 
formula.  The  essential  point  is  that  a  formula  is  needed  for 
scientific  rating  which  will  establish  uniform  relations  in  exposure 
charges  in  all  parts  of  the  country.* 

♦Theoretically  the  importance  of  exterior  exposure  diminishes  in  proportion  to 
efficiency  of  fire  department  protection,  though  when  a  city  fire  "gets  away"  from  a  fire 
department,  exterior  exposure  becomes  far  more  important  in  its  effects  upon  the  aggregate 
loss  ratio  of  the  country  than  in  small  towns.  This,  however,  is  but  another  illustration  of 
the  unrecognized  law  of  comity  in  fire  insurance,  which  in  the  end  compels  the  community 
at  large  to  partake  in  the  disasters  of  great  conflagrations  which  create  unbearable  waves 
in  the  loss  ratios  of  single  classes,  cities  or  states.  View  the  matter  as  we  may,  these  con- 
flagrations, in  the  absence  of  any  acknowledged  system  for  modifying  or  distributing  cost 
waves,  create  a  standing  contest  between  insurance  and  the  community  at  large  as  to  which 
shall  foot  the  bill. 


PRINTED  BY  R.  R.  DONNELLEY 
AND  SONS  COMPANY,  AT  THE 
LAKESIDE  PRESS,  CHICAGO,  ILL. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
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